Good. All right, welcome everyone, and thanks for joining. My name is Terry Ma. I'm the consumer finance analyst at Barclays. Very pleased to have the folks from FNF with us. I have Mike Nolan, the CEO, and also Tony Park, the CFO. So welcome, gentlemen.
Thank you.
Good to be here.
I guess we'll just start and get right into it. Can you maybe just update us on emerging trends for the third quarter? Can you also provide an update on purchase and refi order trends in July and August, and any indications in September?
Yeah, sure. It's been pretty interesting. I'll start with the residential purchase side. You know, in a typical year, orders build sequentially from December every month until it peaks around May or June. Usually, May or June is the peak open order month for residential purchase. And we actually saw in July an uptick over June. So it looks right now that, like, July will be our peak open order month for purchase business. And it's a little bit surprising given where rates are that we had, you know, a slight uptick in July. Now, I think we'll start to see the seasonality build back in that we would typically expect in the back half of the year. But we certainly saw that in August with it coming off of July open orders.
On the refi side, it's been remarkably consistent at what I would consider pretty trough-like levels. We've been opening the same number of orders a day with not a lot of variability, really January through August. We've been running right around 1,000 a day, couple months below. August was 962, but again, you know, given rates at these high rates, and even with rates moving up at different points in the year, those refi orders have hung in at a pretty flat level.
Got it. So the purchase volumes have been pretty resilient despite the higher rate environment. Do you think that resiliency can hold up? Also, what does that tell you about the underlying demand for housing?
Maybe I'll start with the second part of that first. I think it shows that there is a lot of underlying demand, and, you know, there were points in time as we went through the first part of the year, but even in the second quarter, where there were some pretty good spikes in rate from the low sixes up to the high sixes and mid seven, and we didn't really see demand falling off at all, and at times it actually accelerated slightly. So I think it's a little surprising and does point to the demand side of the housing equation. You still have low inventory and multiple offers on properties in certain areas, and even with the affordability issues, people are out still trying to buy homes.
What I'd expect to see is that we'll have the normal seasonality in the back half of the year, to your, the first part of your question, which means every month, August, September, all the way through December, we'll have less volume, on particularly on the residential purchase side, which happens in any typical normal year. The question will be: Will we see a little bit more than the seasonality if rates stay high and affordability stays, you know, stays as a problem?
Got it. So, what's the outlook for refi?
I think refi is going to be at low levels until we get rates probably 75 basis points lower than what they are now. You know, that's really what you need to make a refi tenable, if you will, you know, about a 75 basis point lower rate. And so you need. You know, you get all the people that are buying homes at 6.5% and higher rates aren't really going to be able to refi until rates get down below, you know, what I said. But having said that, we sort of got this basis of refi at the level we've hit now for 8 months. And I would anticipate that continuing, maybe coming off a little bit if rates stay high.
If you go back to the last time rates were at these levels, back in the, you know, early 2000s, I think there were 8% in, in 2000 or maybe 2001, and went down to 7% in 2000. And, and then went down to 6%. We had a huge flurry of refinance activity, even at, you know, much higher rates than what we've experienced the last decade or so. Just that movement from 8% to 7% and 7% to 6%, I think we went from a, maybe a $300 billion refinance market in 2001 to a, a $2.5 trillion market, refinance market in 2003 or something along those lines. So it could be...
Now, we won't see that kind of volume, probably, just because we're only talking about the last year or year and a half of new mortgages at higher rates. But, but there will be, there's always refi demand, and, and, when we see a little bit of rate movement, we get a lot of volume.
Got it. That's helpful. So turning to commercial, how have open orders been trending since the end of last quarter? And what's your outlook on commercial for the rest of the year?
Commercial's been remarkably consistent. You know, we look at our open orders, which is our best window into the environment, of course. We've been averaging around 780 open orders a day, essentially the entire year. I think we averaged.
I think it was 781 in the first quarter, 784 in the second quarter, and I brought it up here, so I wouldn't misspeak. We had 786 open in July and 767 in August. We're staying around that 770, 780 number, very consistent with what we saw in 2015-2019. For those years, we were kind of running similar order volumes, and generated about $1 billion in commercial direct revenue in all of those years. A little plus or minus, but a billion, we'll call it.
Our view for 2023, our kind of base case coming into the year based on our order activity, was really another billion-dollar year. So actually, a very good year historically, not the $1.5 billion we did in 2021 and 2022. You know, 2021, we were opening over 1,000 commercial orders a day. We did that for part of 2022, and then, you know, with the change in rates and some pressure on it. But I feel like the commercial market's held up really, really well, given the environment. And we all see all the headlines around commercial and the concerns around office and distress and different things like that.
But, you know, there's a lot of different asset classes that play into the commercial world for us, and many of them have performed very, very well in spite of the office environment. Things like multifamily and industrial, for example, and some other asset classes that kind of come in and out, like energy and affordable housing and different things like that. So we still feel like we have a very good commercial market. Not as good as 2021 and 2022, but a very good market. And we would expect 2023 to play out where we kind of end up with that $1 billion or so of commercial revenue for the year.
Got it. Can you just generally discuss your exposure to office? Is that a risk, and what other sectors are the biggest drivers for your business, commercial?
Sure. We don't. When we take in commercial orders, we don't classify them by asset class, so we don't have perfect information around which asset classes are driving our commercial revenue. We do a quarterly survey of our 21 national commercial offices. So the way we're structured, we have these national commercial offices that drive about 60%-70% of our commercial revenue for the company, and they do nothing but commercial orders. Then we have 1,300 distributed offices that are doing residential purchase, refi, and commercial. So we survey the 21 that do nothing but commercial and ask questions like, which asset classes are driving the revenue in the quarter, et cetera. As we look back at that information, office probably wasn't ranking in the top four or five in 2021, 2022, or 2023.
Now, if you went back to maybe 2015, it might have been different. It was clearly in 2021, 2022, and so far this year, the two top have been the same: multifamily and industrial. That's just been across the board. And then, depending on the quarter and the respondent, it's things like, as I said before, energy, affordable housing, medical, student, some retail, some hospitality, gaming. I mean, there's a lot of different subsegments. Energy, if I didn't mention that, can be a really big driver of revenue when we have those deals. So office is important, but it's not been the main driver of our business, really, across really those three years.
Yeah, I think I looked at some national statistics not too long ago, and I think office might have been, like, 15% of that.
Our numbers probably track those national statistics, and we probably do 60% of all commercial transactions in the industry, and so you would expect we would track that fairly closely.
Got it. So based on what you're seeing quarter to date, is there any color you can provide on where fee profile is trending for purchase and commercial?
Maybe I'll touch on that a little bit. Commercial, not so much, because commercial can be volatile with, with the mix of business, whether it's national versus local or big deals versus small deals, and so we don't get a good sense on that. In terms of fee profile, it was trending down. I'll take you back a bit. It was trending down really since about June of 2022. When, you know, when rates went up, I felt like there was, there was a little pressure on, on affordability, and, and so our fee profile started trending down through the end of, of last year, through the end of, of 2022. And then, for whatever reason, probably because of, of the scarcity of, of housing and the demand maybe outweighing, the supply, it, it started to trend back up.
And what we've really seen this year is that our residential purchase fee profile has pretty much come back to really as high as it was in the middle or at the early part of 2022, and probably the highest maybe it's ever been. So whatever pressure we saw on home prices, and therefore our fee profile has bounced back, and I think we're pretty much where we were, probably pretty close to where we were in Q2.
Got it. Maybe you can just talk at a high level about how you're managing your business, if we get a higher-for-longer environment versus one where you get a drop in rates in 2024?
Sure. You know, the way we've always managed the business is really just looking at our open order trends and trying to staff up completely to those metrics. We don't spend a lot of time thinking about forecasts or what others think about what the future will look like, because we find that most can't predict that very accurately. So in the current environment, we've done a lot of work on just getting the company smaller. Took significant reductions of staff in the back part of 2022 to kind of position us for 2023. We've been running more flattish on staff through the second quarter. We've had more volume, so that's been good.
But I think, you know, the margins we put up in the second quarter were indicative of the strong work we did on the cost side in the back half of 2022. As we go into 2024, our view is, you know, that we're gonna be cautious about the size of the market. You know, we're probably gonna have inventory levels pretty similar to what we had in the back end of 2022. So the fourth quarter of 2023, from an open inventory standpoint, looked a lot like the fourth quarter of 2022, and that was low inventory levels. So we want to make sure we're positioned on the cost side at least as good as we were coming into 2023 and probably better.
So we're kind of targeting some additional cost reductions so that we come into 2024 a little bit lighter than we came into 2023. And we certainly look at staffing, but we've also been doing as much work as we can do on the office side. Our second biggest expense is our office footprint, and we've taken out about 100 offices in the past, maybe 3/4 ?
Yeah. And we're starting to see some savings there, maybe $2 million-$3 million a quarter, something like that. So it's really a combination of those two things.
To be real smart about our office footprint, work real hard on the staff side, and then if we get more volume as we get into 2024, and that's certainly a probability in terms of where rates go, we'll be positioned very well to get some nice incremental margins out of that. And we've always had an ability to add staff when we need to. I don't think I've ever seen us not be able to add staff. So, we're cautious in the short term, very optimistic in the long term.
Yeah, I mean, if we look at our expense line items just quickly, probably about 70% of our personnel costs are fixed, and probably about 50% of our other operating expenses are fixed. So, you know, we know that we have to act very quickly and, and make those personnel costs as variable as we can by adjusting to volumes as quickly as we can.
Got it. We're talking about margins. Your, your pre-tax title margin was 13.8% in the second quarter. That was up from 10% in the first quarter. Can you maybe just remind investors what drove that increase?
Yeah, I think it was a combination of really two things. First, we got the sequential improvement in the purchase orders in the first two quarters of 2023, and that was not a certainty coming into the year with rates going up as high as they did. And then our cost structure was just really locked down. So the incremental margins we got on the revenue were really high in the second quarter across essentially every business, commercial, purchase, refi, all had really strong pull-throughs on the incremental revenue.
And then our non-title businesses that are in the title segment that factor into our margin, that we don't talk a lot about, but they can flex margins a little bit one way or the other, all performed really well. On top of that, things like our subservicing business, long-term home warranty business, appraisal, some of the other, you know, ancillary businesses, and that was probably a tailwind to margins as well. Not as significant as the other, but certainly helped margins in the second quarter.
Got it. So, what's the outlook for title margin in the third quarter, and kind of what are the moving pieces investors should be aware about?
Yeah, so we would expect margins to be good in the third quarter. You know, we don't guide the margins. We don't predict margins. I guess the puts and the takes around the third quarter would be, you know, we would anticipate refi to be flattish, maybe slightly down, but it's already at a pretty low level, so the impact is less. We would probably expect closings to be a little lighter on the residential purchase side in the third quarter, so maybe a little bit less residential purchase revenue in the third quarter vis-a-vis the second. Commercial, base case is probably pretty consistent with second quarter, maybe could flex up a little bit. So that's always a little bit of a wild card because, you know, commercial can be a little more lumpy on the closes.
Cost should be in line. I don't think costs will be a headwind to margins in the third quarter. And then those non-title businesses could be a little bit of a flex. So good margins, whether they match or beat the second quarter, I can't say, but I think they'd be pretty solid.
Got it. And then you guys have guided to a 15%-20% title margin in a more normalized environment. Can you maybe just talk about that? You were closer to the low end in the second quarter, and what gets you to the high end?
Yeah, I think to think about the 15%-20% as a full year margin, we really need a better purchase market. I mean, that's really the key. We are at trough levels in purchase. When I think about purchasing, about existing home sales data, and the annualized number right now is in the low 4s. At the beginning of 2022, it was in the 6s.
... I mean, that's an incredible difference in a year, a year's time. And you, you'd have to go back to, like, pre-2000 to find a smaller existing home sale market. So clearly not normalized by anyone's definition. And we were in the, the 5s and the mid-5s and then 6 all through the post-recession years.
So I think, I think the starting point is you got to get back to a more, more normalized home sales market, which is somewhere north of 5 billion in my mind, maybe mid-5, 6. And then, you know, probably a consistent commercial market. And then refis, you know, I don't know that we need a ton of help on refis, but certainly when you have those outer years like we had in 2021, with the $2.5 trillion refinance market, that's gonna help margins as well.
I think with the volume levels that we're seeing or that we saw through the first half of the year, the 15.8% margin, you know, I thought was really strong. Partly aided by the fee profile, which I talked about as being really helpful on the purchase side, but also just the cost actions that we took.
Okay, got it. That's helpful color. So looking forward, MBA and Fannie forecast $1.9 trillion-$2.0 trillion in total mortgage originations in 2024. Does FNF have a view on what 2024 looks like?
Yeah, again, you know, we certainly look at the MBA forecast and the Fannie Mae forecast, and we... You know, when we project out the next year, it's really a kind of a bottom-up process. We have about 180, what we call profit centers, that make up the company, and those are just geographically organized businesses. You know, it could be, you know, some in Texas, et cetera, et cetera. And we have a budgeting process where they do it from the ground up, and we aggregate it, and then we kind of layer in, you know, kind of what MBA and Fannie Mae think.
And we're generally probably in any given year, we're similar to maybe what they're thinking, or the average of the two is how it works out.
But, we haven't gotten to that point yet for 2024. I think both Fannie and MBA are projecting a better purchase environment, a modestly better purchase environment. I think one was 6% up and the other was maybe 12 or 14. 14 seems a little optimistic to me, but that's just me. I don't think you're gonna see appreciable interest in the refinance business in 2024. I don't know that they're forecasting much. And then commercial, you know, that could be very similar to 2023, kind of my base case.
I mean, some of this is gonna be rate dependent, and as we know, it's pretty hard to predict rates. I mean, I think conventional thinking, not so long ago, was that rates were gonna trend down this year in 2023. And I think one of those had them somewhere in the five something percent. I don't remember whether it was Fannie or MBA, but regardless, it doesn't look like they're headed there anytime soon. And so, yeah, we'll see what rates do into next year, both on the refi side and really to some extent on the other pieces.
If we do get lower rates, if they get down towards 6%, I think the refi numbers will be appreciably stronger than we just talked about, and the purchase numbers will be a lot stronger, and that could really change the dynamic of what I just said and what MBA and Fannie are forecasting. But if they stay up around 7%, you know, we're probably in the earlier comment about higher, higher for longer environment.
Got it. So maybe you can just talk about some of the things you're doing right now to position the company for when volumes do rebound, and the leverage that exists in your business, for when the turn comes.
Well, I think it's you know, we've got a lot of advantages, I really believe, in our business. One, we've got unmatched scale in the industry. We've got a go-to-market approach that nobody else has, which is a multi-brand strategy. And, you know, we're really well-positioned in the markets that matter the most, where the most volume is. You know, you think of places like California, Texas, Florida, New York. You know, we're really well-positioned, particularly on the direct side. So as those volumes come back in that direct footprint, we're gonna outperform. We're just gonna outperform. We've got really strong market share. And then on the technology side, we've been making a lot of investments to improve our customer connectivity, to sort of the transparency and efficiency of the business that we do.
We've built out our digital transaction platform, the operation fully deployed across the entire footprint. We've got, in the last 30 days, over 200,000 real estate agents and real estate professionals actively using the technology on the mobile app and portal to have visibility into the open orders. So we're continuing to focus on the technology side, which we believe improves the stickiness of the customers. And then as the volumes come back, I think our scale will really show up, and our multi-brand strategy will really help us on the upside.
Got it. So turning to technology, inHere is a tech platform that you've been investing in for many years maybe. Can you just talk more about that platform, the strategic rationale and the synergies you expect to get from it?
Yeah. So as I was just kind of touching on, you know, our thinking was not so much. You know, a lot of companies were thinking about digital closing, the signing component digitally. And we can do that, and that's fine. But we really thought about, what about the time in a transaction before that, the last 45 minutes? A typical residential purchase deal takes 40-45 days from when you sign the purchase agreement, and the signing's about the last 45 minutes of it. So we really thought about: How do you improve the first 40 days so all the participants make it more, as I said, more transparent, more visible, less risky by getting it out of email?
We really thought if you can get people working in a digital transaction environment where people are authenticated, it's a portal environment, it's not email, it's much easier to hack, so to speak. And you could give real estate professionals 24/7 visibility into their transaction. We thought that was potentially a really powerful idea. And so that's what we've done. Now we're thinking about how do we add other products and services to that platform? Could be real estate content, it could be other products and services that people need to consume.
And so we're focused now on how to build that out even more, and we feel like it differentiates us from our competitors, hopefully drives market share, and then maybe as a side benefit, reduces the number of phone calls and emails going back, of course, of all the parties. And that will have both a benefit in terms of just a better experience and maybe save people's time inside the transaction.
Got it. That's helpful to us. So maybe you can just give me an update on overall engagement of the platform.
Yeah. So, since... On the last two years, on the consumer side, so buyers and sellers are invited to it as well, we've had 1.2 million consumers engage with us digitally for opening their transaction. And as I said, in the last quarter, last 30 days, we had about 200,000 real estate professionals actively using the platform, and that's probably double from a year ago.
Yeah.
We think that number is just gonna keep going up.
Got it. So since we're on the topic of technology, and there's been concerns from time to time that the title industry is ripe for disintermediation, can you just discuss your views on that and the competitive position that FNF has?
Well, I think our competitive position is really strong for some of the reasons I already talked about. You know, there's always potential disruptors, and I think in any industry, and there's been some in the title industry that haven't worked out too well, particularly more recently. But, you know, I think at the end of the day, focus on your customers. That's the best way not to be disrupted. Continue to bring value to the customers that matter most, real estate agents, buyers and sellers, loan originators, attorneys, and you do that in many ways. One is through technology, and others are through personal relationships, trusted relationships.
That's something we focus on every day, and I think that goes a long way towards somebody disrupting your business when you're bringing value to the end users of the product and service.
Got it. Makes sense. So just turning to capital, FNF did not buy back any shares in the second quarter. So can you just remind us what your capital allocation priorities are, and how investors should think about the buyback for the second half and maybe into 2024?
Sure, yeah. The priorities clearly are the dividend. We pay $0.45 a share, $1.80 annually, which is roughly $500 million on today's share count. And so that's their priority. And beyond that, it's really a few things. It's certainly buybacks at opportune times. It's M&A, and we're always active in the M&A space. And, you know, to maybe a lesser extent, we look at bad debt and debt cap and that sort of thing. We have about $900 million of holding company cash on the balance sheet..
But, to your point, Terry, the board looked at the market backdrop as we entered the year and thought, "You know, it's probably a decent time to pause." We bought back $1 billion in stock over the last two years, and I'm sure it'll come into the playbook again as we work our way through this year and next. But at the same time, there was no rush, really, to be too aggressive, given that, you know, it's a tough market. I think everyone would admit it's a tough, unpredictable market. You don't know how long it takes to play out, and so we did not buy back any shares through the first half, to your point.
We really don't pre-announce where we're headed with buybacks, but my expectation would probably be that we'd be more active next year than we are this year.
Got it. So as a follow-up, how are you thinking about M&A opportunity in this environment?
Yeah, I'll touch on it. Mike can probably add as well. I mean, we're always active in M&A. As I mentioned, we usually spend $200-$400 million annually on agent acquisitions and maybe title and real estate-related type businesses. Sometimes more, sometimes less. During the pendency of Stewart Title, we bought fewer, spent less on acquisitions, and then following that, obviously, we bought F&G in the middle of 2000.... A lot of the deals that we do are all fairly small. We don't announce them. We did talk about the TitlePoint acquisition that we closed at the very beginning of this year. And we've we're definitely doing, you know, title agent acquisitions.
But we also need to make sure we're comfortable with valuations and coming off a market that's so strong, you know, in 2021. You know, you have to make sure we're valuing based on current market and not prior results. And so, you know, that can take some time maybe to arrive at the right place. But yeah, we're active. We think it's a great way to bring talent into the organization and bring, you know, long-term revenue and profits. And we usually pay 4 or 5 times pre-tax earnings for most of the deals.
Got it. So I'm turning to F&G. Can you maybe just remind us the rationale for acquiring it and how that's played out over the last three years? And maybe just an update on F&G's performance relative to your expectations.
Yeah, well, on the performance, side of things, it's been spectacular. It's been well ahead of expectations. I think our initial plan was to grow assets from $25 billion to $50 billion over five years, and we're closing in on $50 billion after three years, and so well ahead of the plan there. We branched, or F&G's branched from one distribution channel into five, and singles have gone from $3 billion when we bought them to a run rate of nearly $13 billion today. That's gone great. The performance has been wonderful. One of the challenges we've had is valuation and a lot of input from people who feel like we haven't gotten a true valuation. And we agree, certainly from the FNF share price, that we haven't gotten a valuation.
But at the same time, we feel like we've built a really valuable company, even if it's not currently valued. We paid $2.7 billion, and, you know, I think if you look at market valuation for this type of business, you know, maybe it's 8, 9, 10 times earnings, and earnings are, you know, $450 million-$500 million after-tax earnings on the current run rate. So, you know, you can do the math. We did spin off 15% of the company to FNF existing shareholders back in December to try to set a public valuation on the company, thinking that that could help drive some a better valuation in FNF shares. And, you know, it probably has a little bit.
It came out at $19 or somewhere in that range and has definitely trended up in the last 90-120 days. And so has FNF share price. But again, you don't know exactly what drives those shares. But, you know, I think that part's been positive. Do we think we have a full valuation embedded in our share price? No, but at the same time, at least we have the company out there, and, you know, people can buy it. There's not a lot of flow, which is another challenge that we have.
But yeah, I think that in terms of the rationale, the hedge, the balance to our earnings, I think that all that's been really strong, and I think maybe over time, we'll get the true benefit of that.
Great. So, lastly, is there anything you're considering to unlock more value, created by your ownership of F&G?
Yeah, we talked about in the last last quarterly earnings call that there are certainly things we could do, whether we will or, or not, it's hard to know. F&G is, is throwing off cash flow. I think the current run rate is somewhere around $800 million annually, but we do reinvest that in F&G's growth because it is fairly capital intensive. So other than the dividend that F&G pays to its shareholders, which is roughly a hundred million dollars annually, you know, that, that cash is being reinvested in growth to, to F&G. I think we do have optionality when and if we decide, you know, to explore that, including things like a, a tax-free spin after five years of ownership or a taxable spin, even before we can float more shares.
We have 15% of stake, we could float more shares. If we were so inclined, we could pursue a sale of all or a portion of the business or a merger with other companies. You know, I think that industry has transaction history, if you will, even recent history. And so, you know, I think that there, there's optionality if we go there. But at the same time, I think the board's been very pleased, as I mentioned, with what we've seen in terms of performance and the value we've created.
Great. So I'm going to pause here and just queue up the two audience response questions that I have. Operator? The question is, relative to an MBA forecast of total mortgage originations of 1.6-1.8 in 2023 and $1.9 trillion-$2 trillion in 2024, you expect 2024 mortgage originations of one, $1.4 trillion-$1.6 trillion, $1.61 trillion-$1.8 trillion, $1.81 trillion to $2 trillion or four, greater than $2 trillion?
... Oh, so pretty evenly split between the low end and I guess $1.8 trillion and $2 trillion. So, the second question, please. Over the next year, would you expect your position in FNF to one, increase, two, decrease, or three, stay the same?
There's only one right answer here.
Oh, mostly stay the same.
Better than zero.
Better than zero. Okay, so opening it up to Q&A if there are any questions right now. I think we have one right here. Just wait for the mic.
Just going back to the F&G discussion, and you mentioned how it was part of the rationale was the hedge you have in this kind of rate environment. Given how different this rate environment might be relative to what we've seen in the past 20 years, how do you see that hedge actually working out about the investment book at F&G, and some of the challenges remember, the competition have in the book and the product book. Is it working out as you expected or including the value?
Well, if you just look at earnings, it's adding, what? $450 million-$500 million earnings in 2023. And title will do, you know, I don't know what, but declining number where it was before, so it's probably third.
Yeah. Yeah, probably about right.
Yeah. So from an earnings standpoint, yeah, it's, it is working out. I mean, if you look at the balance sheet, and I think that's part of your question, the good news about F&G portfolio is it's matched up with their liabilities and credits. The credit side of things has been really strong. They haven't had any issues there. And so with a six or seven year duration, you know, no need to sell any of those before their time, before those, you know, that money needs to be returned to the annuitants. So, from that perspective, I mean, obviously it's managed closely and feel good about it. But, you know, as long as there's no credit challenges there, and again, surrender charge protected as well.
We don't really see, like with the, you know, the banking crisis where you do see... You can see a run on the bank. You just don't have that in the space.
Any other questions? I think we'll wrap it up with that. So thank you.
Thanks, Terry.