Fidelity National Financial, Inc. (FNF) Earnings Call Transcript & Summary

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.

I guess we'll just start and get right into it. Can you maybe just update us uprooting 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?

Yes, sure. It's been pretty interesting. I'll start with the residential purchase side. In a typical year, orders built 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 signed 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 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, and we certainly saw that in August with it coming off of July orders. On the refi side, it's been remarkably consistent at why we consider pretty trough like levels. We've been opening the same number of orders a day with not a lot of variability, really, really January through August. We've been running right around 1,000 a day, a couple of months below August was 9.62. But again, given rates at these high rates and even with rates moving up at different points in the year, those refi orders have hung into 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? And also, what does that tell you about the underlying demand for housing?

I think, I'll start with the second part of that first. I think it shows that there is a lot of underlying demand. And there were points in time as we went through the first part of the year, but even in the second quarter, where there's some pretty good spikes in rate from the low 6s up to the high 6s and 7. And we didn't really see demand falling off at all times to 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 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 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 half now. That's really what you need to make a refi tenable, if you will, about a 75 basis point lower rate. And so you need -- you had all the people that are buying homes at 6 and higher rates aren't real into way to get down below what I said. But having said that, we got this basis of refi to the level we've been 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 early 2000s, I think there were 8% in 2000 or maybe 2001 and went down to 7% and then went down to 6%. And we had a huge flurry of refinance activity even at much higher rates than what we've experienced the last decade or so, just that movement from 8 and 7 to 6. I think we went for maybe a $400 billion refinance market in 2001 to 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 1.5 years of new mortgages at higher rates. But there will be -- there's always refi demand. 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 has been remarkably consistent. 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, but I wouldn't misspeak. We had $786 open in July and $767 in August. We're staying around at $770, $780 number, very consistent with what we saw in 2015 to 2019 of 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, about $1 billion, we'll call it. And our view for 2023, our kind of base case coming into the year based on our order activity was really another $1 billion a year. So actually, a very good year historically, not the $1.5 billion we did in '21 and '22. '21, we were opened over 1,000 commercial orders a day. We did that for part of '22 and then with the change in rates and some pressure on it. But I feel like the commercial markets 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 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 and made 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 portal housing and different things like that. So we still feel like we have a very good commercial market, not as good as '21 and '22, it's a very good market. And we would expect 23 to play out where we kind of end up with that $1 billion or so of commercial revenue for the year.

Got it. You just generally discuss your office. Is that a risk? And what other biggest drivers our business commercial.

Sure. 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, we drive about 60% to 70% of our commercial revenue for the company, and they do nothing with commercial orders. Then we have 1,300 distributed offices that are doing residential purchase, refine commercial. So we surveyed the 21 that nothing like commercial and asked 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 4 or 5 in '21, '22 and '23. Now if you went back to 2015, it might have been different. It was clearly in '21, '22 and so forth this year, the 2 tops have been the same, multifamily and industrial, that's just been across the board. And then depending on the quarter and the respondents, as I said before, we're energy affordable housing, medical students, 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 driver of our business really across really those 3 years. Yes, I think I looked at the national statistics not too long ago. And I think office might have been like 15% of that. And our numbers probably track those national statistics, and we probably do 50% of all transactions in the industry. And so you would expect we would track that by closely.

Got it. So based on what you're seeing quarter-to-date, is there any color you can provide on where fee per file is trending for purchasing commercial?

Maybe I'll touch on that a little bit. Commercial, not so much because commercial can be volatile with the mix of business, whether it's national, is local or big deals versus small deals, and so we don't get a good sense on that. In terms of people file, it was trending down. I'll take you back a bit. It was trending down really, since about June of '22, when rates went up, I felt like there was a little pressure on affordability. And so our people started trending down through the end of last year of 2022. And then for whatever reason, probably because of the scarcity of housing and the demand outweighing the supply -- it started to trend back up. And what we've really seen this year is that our residential purchase fee per file 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 prices and therefore, our fee per file has bounced back. 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 the business is a higher-for-longer environment versus one you got to drop the rates in '24?

Sure. The way we've always managed the business is really just looking at our open order trends and trying to take to those metrics. We don't spend a lot of time thinking about forecasts on 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 at in the back part of '22 to kind of position us for '23. We've been running more flattish on staff through the second quarter. We've had more volumes, so that's been good. But I think 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 '22. As we go into '24, our view is we're going to be focused about the size of the market. We're probably going to have inventory level, really similar to what we had in the back end of '22. So the fourth quarter of '23 from an open inventory standpoint we look at like the fourth quarter of '22, and that was low inventory -- so we want to make sure we're positioned on the cost side, at least as good as we were coming into '23 and probably better. So we're kind of targeting some additional cost reductions that we come into '24 a little bit later than we came into '23, 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 quarters. Yes. And we're starting to see some savings there, maybe a couple of million dollars a quarter, $2 million, $3 million core or something like that -- so it's really a combination of those 2 things. real smart about our office footprint work real hard on the staff side. And then if we get more volume as we get into '24, 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, and 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 happen in the long term.

Yes. 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 we know that we have to act very quickly and make those personal comps to variables and by adjusting the volumes as quickly as [Indiscernible]

We're talking about margins. Your pretax title margin was 15.8% in the second quarter. That was up from 10% in the first quarter. Can you maybe just remind investors what drove that increase?

Yes, I think it was a combination of really 2 things. First, we got the sequential improvement in the purchase orders in the first 2 quarters of '23, and that was not a certainty the year with wastelands they did. And so with that, it really set us up for a nice increase in closings in the second quarter. And then our cost structure was 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 at really strong pullets on the penal revenue. And then our nontitle businesses that are in the title segment that factor into our margin that we don't talk a lot about, but they can fetch 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 ancillary businesses, and that was probably a tailwind to margins as well, not as significant as the other, but certainly not part of the... 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 that you're aware of?

Yes. So we would expect margins to be good in the third quarter. We don't guide the margins. We don't predict margins. I guess the puts and the takes around the third quarter would be we would anticipate to be flattish, maybe slightly down, but it's already at a pretty low level. So the impact is last. 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 it could cut up a little bit. So that's always a little bit of a wild card because commercial can be a little more lumpy than closes. All should be in line. I don't think costs will be a headwind to margins in the third quarter. And then that -- those nontitle businesses could be a little bit of a flux. So good margins, whether they match or beat the second quarter, I can't say, but I think it pretty solid.

Got it. And then you guys have guided to a 15% to 20% type of market and in a more normalized environment. Can you maybe just talk about that, you're closer to the low end in the second quarter. I know what gets you to the high end?

Yes. I think if you think about the 15% to 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 and 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 '22, it was in the 6s. I mean, that's an incredible difference in a year's time. And you have to go back to like the mid-2000 to find a smaller existing home sale market are clearly not normalized by anyone's definition, and we were in the 5 and the mid-5 and then 6 all through the post-recession years. So I think the starting point is you got to get back to a more normalized sales market, which is somewhere north of $5 billion, in my mind, maybe mid-5% mix -- and then probably a consistent from out. And then refis, 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 '21, with the $2.5 trillion refinance market, that's come 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, I thought was really strong, partly aided by the deeper file, what I talked about as being really helpful on the purchase side, but also just the cost actions that we take.

Okay. Got it. That's helpful color. So looking forward, MBA and Fannie forecast $1.9 billion to $2.0 trillion in total mortgage originations in 2024. Does that any of view on what 24 looks like?

Yes. Again, we certainly look at the MBA forecast and the Freddie Mac forecast. And we -- when we project out the next year, it's really a kind of a bottom-up process. We have about 180 profit centers that make up the company. And those are just racially organized businesses. It could be 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 kind of what and Freddie Mac tank. And we're generally probably in a particularly in any given year, we're similar to maybe what they're thinking or the antigen to is how it works out. But we haven't gotten to that point yet for '24. I think pan and NBA are projecting another purchase environment, a modestly better purchase environment, 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 going to see appreciable refinance business in '24. I don't know that they're forecasting much. And then commercial, that could be very solar to '23 kind of my base case.

I mean, some of this is going to 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 going to trend down this year in 2023. And I think one of those had somewhere in the 5 something percent. I don't remember whether it was Ban or MBA, -- but regardless, it doesn't look like they're headed there any stone. And so yes, 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 per would be a lot stronger than that could really take net of what I just said in one MBA and our forecasting, but if they stay up around 7%, we're probably in the earlier comment about higher for longer environment.

Got it. So maybe you can just talk about some of the things we're doing right now, the efficient company for when volumes do rebound and the leverage that is new business when the turn comes.

Well, I think it's -- 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 we're really well positioned in the markets that move the most, where the most volume is, you think of places like California, Texas, Florida, New York, really well positioned, particularly on the direct side. So as those volumes come back in that direct footprint, will outperform. We're just going to 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, just the transparency and efficiency business that we do. We've built out our digital transaction platform. The operation is fully deployed across the entire footprint. We've got in the last 30 days, over only 200,000 real estate agents, the real estate professionals actively using the technology and the mobile app on the portal to they have visibility into the quarter. 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, really show up at our multi-brand strategy will really help us on the upside.

Got it. So turning the technology in here, the 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?

Yes. So as I was just kind of touching on -- our thinking was -- not so much -- a lot of companies were thinking about digital closing, the signing component digitally. And we can do that, that's fine. But we really thought about what about the time of the transaction before that, the last 45 minutes. Typical residential purchase all takes 40 to 45 days from when you sign a purchase agreement. And the signings out the last 45 minutes of it. So we really thought about how do you improve the first 40 days all the participants make it more, as I said, more transparent, more visible, less risky by getting it out of e-mail. And we really thought we get people working in a digital transaction environment where people are authenticating -- it's a total environment. It's not e-mail. It's much easier to hack, so to speak. And you could give real estate professional, 24/7 visibility into the transaction. We thought that was potentially a really powerful idea. And so that's what we've done. And now we're thinking about how do we add other products and services to that platform could be real estate content when it could be other products and service because the 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 e-mails 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 go. So maybe you can just give an update on overall engagement of the platform.

Yes. So since we -- on the last 2 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 doubled from a year ago. And we think that number is just going to keep going up.

Got it. So since we're on the topic of technology, and there has been concerns from time to time that the industry is right for distance mediation. Can you just discuss your views on that and the competitive position that...

Well, I think our competitive position is really strong for some of the reasons already talked about. There's always potential disruptors, I think, in any industry, and there's been some in the title industry that haven't pulled out well, particularly more recently. But 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 for the customers that matter most, real estate agents, buyers, installers, loan originators, attorneys, and you do that in many, many ways. One is technology and others are through personal relationships trusted relationships. And that's something we focus on every day. And I think that goes a long way towards certainly disrupting your business when you're bringing value to the end users product to service.

Got it. Makes sense. So just turning to capital. FNF not buyback in each there has been in the second quarter. So can you just remind us what your capital allocation priorities are and how investors should think about the buyback in the second half may be into '24.

Sure. Yes. 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 our priority. And beyond that, it's really a few things. It's certainly buybacks at opportune times at M&A, and we're always active in the M&A space and to maybe a lesser extent, we look at debt GAAP and that sort of thing. We have about $900 million of holding cash on the balance sheet. But to your point, Terry, the Board looked at the market backdrop as we entered the year and thought it's probably a decent time cause. We bought back $1 billion in stock over the last 2 years. And I'm sure it will 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 it's a tough market. I think everyone would admit 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 preannounce 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?

Yes. 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 million, $300 million annually on agent acquisitions and maybe title and real estate-related type businesses, sometimes more, sometimes less during the dependency of Stewart Title, we bought fewer spent less on acquisitions and then following that, obviously, we bought FG 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 idle Point acquisition that we closed at the very beginning of this year. And we're definitely doing title agent acquisitions -- but we also need to make sure we're comfortable with valuations and coming off a market that's so strong in 2021, you have to make sure we're valuing based on current market and not prior results. And so that can take some time maybe to arrive at the right place. But yes, we're active. We think it's a great way to bring talent into the organization and bring long-term revenue and profits. And we usually pay 4x, 5x pretax earnings for most of goes.

Got it. So turning to F&G. Can you maybe just remind us the rationale for acquiring it. that's played out over the last 3 years. And maybe just an update on F&G's performance relative to your expectations.

Yes. 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 5 years, and we're closing in on $50 billion after 3 years. And so well ahead of the plan there. We branched or F&G's brand from one distribution channel into 5. And files have gone for $3 billion. We would have 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 F&F share price that we haven't gotten the 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 I think if you look at market valuation for this type of business, maybe it's 8, 9, 10x earnings and earnings are $450 million to $500 million after-tax earnings on the current run rate. So 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 shares. And 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 to 120 days. And so it was FX share price. But again, you don't know exactly what drives those shares. But I think that part has been positive. So 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 people can buy it. There's not a lot of float, which is another challenge that we have. But yes, I think that in terms of the rationale, the hedge, the balance to our earnings, I think all that's been really strong. And I think maybe over time, we'll get the 2 benefit of that.

Great. So lastly, is there anything you're considering to the motor value created by your ownership...

Yes, we talked about in the last quarterly earnings call that there are certainly things we could do, whether we will or not, hard to know. F&G 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 holder, which is roughly $100 million that cash being reinvested in growth to F&G. I think we do have optionality when and if we decide to explore that, including things like a tax-free spin after 5 years of ownership or a taxable span even before we can close more shares. We have 15% of think we can flow more shares. If we were on client, we could pursue a sale of all or a portion of the business or a merger with other companies. I think that, that industry has transaction history, if you will, even recent history. And so I think that there's optionality if we go there. But at the same time, I think the Board has been very pleased, as I mentioned, with what we've seen in terms of performance and the value we've created.

Great. Some of your polls here and just queue up the 2 audience response questions that I have, operator. The question is relative to the MBA forecast of total mortgage originations of $1.6 - 1.82 and 1.9 to 2.24. We expect 2024 mortgage origination of $1, 1.4 billion to $1.6 billion to 1.61. 1.812 or 4 greater than 2?

So pretty evenly split between the low end and I guess, 1.8 and 2.

Over next year, what do you expect the position of FNF, one, increase; two, decrease; or three, stay the same?

There's only one right answer here.

Mostly stay the same. Okay. So open it up to Q&A, if there are any questions right now.

Just going back to the F&G discussion, you mentioned that was part of the rationale was the hedge you have in the kind of rate in fiber, given how different this rate environment might be relative to in the past 20 years, how do you see that hedge actually working on you think about the investment book at F&G and some of the towns or remedy competition within the book and the product book. Is it working out as you expected or included?

I mean if you just look at earnings, it's adding, what, $450 million to $500 million earnings in '23 and title will do, I don't know what a declining number where it was before. So it's probably third...

Yes. Yes, probably about right. Yes. So from an earnings standpoint, 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 after portfolio is it's matched up with their liabilities and credit side of things has been really strong. They haven't had any issues there. And so with a ticker 7-year duration, no need to sell any of those before their time before those -- 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 as long as there's no credit challenges there. And again, surrender charge protect us well. And so we don't really see into banking prices where you do see -- you can see a run on the bank. You just don't have that in place.

I'll wrap it up with that. Thank you.

Thanks, Terry.