LDI - loanDepot: Not Adding To The Depot

Summary

• loanDepot has seen its business being decimated amidst rapidly rising interest rates.
• Losses are substantial as the near-term outlook for the mortgage market is simply very dire.
• Equity provides a small cushion, but the reality is that the situation simply is very harsh and highly uncertain.

In April, I concluded that loanDepot, Inc. ( LDI ) was a not-so-popular, yet interesting, play. After the company went public early in 2021, amidst the peak of the Covid-19-induced mortgage boom, shares quickly traded around the $30 mark. Fast forwarding to April, shares have fallen to $3, resulting in an interesting situation.

A Review

Founded in the 2009-2010 recession, loanDepot saw rapid growth in the decade that followed. Its brand and adoption of technology meant that the company originated some $80 billion in mortgages ahead of its IPO.

Its Mello technology, focus on advertisement, and high NPS scores meant that the company grabbed a 2.5% nationwide market share, positioning the company as a growth play in a booming mortgage market.

The company went public at $14 per share, to rally to the $30 mark in the second day of trading as investors were extrapolating the results in their expectations.

To provide some perspective: the company posted rather stable sales in a $1.1-$1.3 billion range in the years 2017-2019, a time when it posted modest profits. Momentum was incredibly strong in 2020, with $3 billion in revenues reported in the first three quarters of the year, on which a huge $1.5 billion of profits was reported. These earnings trended at $6 per share, at just 3-4 times earnings, as it was understood to all that these earnings numbers could not be maintained.

Similar trends were seen by many competitors, which include Rocket Companies ( RKT ) and Guild Holdings ( GHLD ) , both having gone public to take advantage of the same momentum of the market.

The Downfall

loanDepot ended up reporting $4.25 billion in revenues in 2020, on which it reported adjusted earnings of $1.46 billion. The company posted first quarter 2021 revenues of $1.24 billion, on the back of $41 billion in origination volumes, on which earnings were reported at $458 million, or about a dollar per share.

Second quarter origination volumes fell to $34 billion as revenues fell to $825 million, with adjusted earnings down to a dismal $58 million. Third quarter origination volumes fell to $32 billion, and came in at $29 billion in the final quarter of 2021. This meant that fourth quarter revenues fell to just $724 million, with adjusted earnings reported at a mere $29 million.

With 321 million shares trading at $3 per share, loanDepot was valued at just below a billion dollars in April, which compares to a two billion run rate in terms of profits just a year before! This arguably comes as adjusted earnings have largely evaporated.

With shares trading around 10 times adjusted earnings of around $100 million, valuations started to look demanding, even after earnings were down 95%. The issue is that 2022 was set to become a tough year, as interest rates had moved up significantly in the first quarter of 2022, creating a tough setup.

Another 50% Loss

Since initiating a minimal stake in April, fully recognizing that this is a cyclical and volatile investment, shares have been cut in half again, now trading at $1.50 per share.

This is the result of incredible momentum in terms of interest rates, which have shot up in a dramatic fashion. This does not only trigger an implosion in demand for mortgage originations, but results in real mark-to-market losses as well, as well as raises real concerns about delinquencies.

The pressure on the business was clearly visible in the results, as first quarter sales plunged to $503 million on the back of just $21 billion in mortgage origination volumes. The company posted a steep $91 million loss, equal to $0.25 per share. The size of the balance sheet is worrying, as the total assets surpassed more than $10 billion, mostly including loans held for sales, with the market clearly discounting the book value of equity of $1.5 billion.

The outlook for the second quarter was utterly disappointing, with origination volumes seen between $13 and $18 billion, as investors should brace themselves for greater pressure on the business.

In August, second quarter results revealed $16 billion in origination volumes as revenues fell to just $308 million, with net losses posted at $224 million. While the company managed to reduce expenses in a minor way, the outlook is even worse, with third quarter origination volumes seen between just $5.5 and $10.5 billion.

Reported equity holdings fell to $1.2 billion amidst these losses. On the bright side is the rapid pace at which the firm is cutting costs, as the headcount will fall by more than 2,000 workers during the quarter, with less than 6,500 workers expected to be apparent on the payroll by the end of the third quarter.

And Now?

The extent of the losses is very large, yet there are some green shoots. loanDepot, Inc. is rapidly cutting its workforce in response to the changed market circumstances, as activity levels are simply very low. Another worry is that of the market share losses, yet the complete implosion of the market hurts the business more than a small decline in the market share, as nationwide volumes have collapsed far below the $2 trillion mark here.

The situation is still highly uncertain, yet there still is some equity which provides a lifeline until the market turns. However, things will likely get uglier before they get better. Hence, I am anxiously waiting to learn the loss rate in the third quarter and outlook for origination in the fourth quarter, which likely is not positive, making this a highly speculative play.

With shares cut in half from April, I see no reason to alter a tiny long position, as the operating condition for the business are very harsh by all means.

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