LendInvest plc (LINV.L) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us today for LendInvest plc full year results to the 31st of March 2023. The presentation will commence shortly. [Operator Instructions] This call is being live streamed or webcast for a wider audience and will be recorded. By participating in the Zoom webinar, you are agreeing that recorded made during this event may be shared by LendInvest. After the presentation, we will conduct a Q&A session. [Operator Instructions] I would now like to hand over to Rod Lockhart to open the presentation.

Good morning, and thanks for your time today and the opportunity to present our results for the year ended 31st of March 2023. Joining me on the call for the last time today is Michael Evans. It's been a pleasure to work with Michael over the last 6 years, and I want to take this opportunity to thank him for his huge contribution to our business, including being instrumental in our listing in 2021. I'll miss him, and I wish him all the best for the future. I'm delighted to officially introduce you to David Broadbent, our incoming CFO, who you'll meet later in the presentation. Dave has fantastic experience in financial and technology businesses, and I'm really looking forward to working closely with him. We'll run through the slides, which will take approximately half an hour, and then the 3 of us will be available for Q&A. It's certainly an interesting time to be in the mortgage and property markets. And I'll start by providing a brief overview of the market backdrop. I'll then cover some of the key financial and strategic highlights. Michael will then pick up and talk through our financial performance. And finally, I'll cover the strategic update alongside Dave and we'll conclude with the outlook and the longer-term opportunity. So the last 12 to 18 months have been a challenging environment for us, high and persistent inflation has driven base rate to the highest point since 2008 and the 5-year swap rate, which is a key component for pricing 5-year fixed rate mortgages has been hugely volatile. With inflation persisting, it looks like base rate hasn't reached its peak. This has driven mortgage rates to the highest levels or levels not seen since 2008 and lenders having to pull products and reintroduce them at materially higher levels. Despite this backdrop, house prices have been incredibly resilient and rental growth has been exceptionally strong, but we are starting to see some weakness in house prices and some of the house prices indices are showing falls, and there's been a slowdown in the market levels of mortgage applications and property transactions. While it feels like we're getting towards the top of the interest rate cycle, which you can see on this chart and is reflected in recent swap falls. It's crucial to acknowledge that for rates to stabilize, we do need to see inflation reducing from its current levels. This environment has created its fair share of challenges for us, but it's provided us with numerous occasions to demonstrate our ability to adapt. Over the year, we've evolved our products to cater for the specific requirements of our borrowers in these changing circumstances. We've demonstrated the resilience and agility of our business and in embracing change, we've turned challenges into opportunities. We've cemented our position as a forward-thinking agile and reliable mortgage provider. As we move forward, we'll continue to navigate the ever-evolving landscape and be ready to adapt to seize new opportunities as they arise. This environment has meant that we've had to move quickly and be tactical to take advantage of product opportunities as they've arisen. As interest rates started to rise 18 months ago, we introduced longer 7- and 10-year fixed rate terms for buy-to-let mortgages. These quickly became our most popular buy-to-let products as borrowers looked to lock in rates for longer in a rising rate environment. As the swap rates rose and borrowers predicted we're reaching the top of the interest rate cycle, we introduced base rate tracker products, which proved popular. Today, one of our best-selling products is a bridging loan for landlords to allow them to move quickly to buy properties as they see value in a weaker property market. But while we've been tactical, we've also made great strides in our strategic progress too. I'm thrilled that we successfully introduced our inaugural residential mortgage product range marking a huge milestone for our business and delivering on a key ambition that we set out in our IPO. Given the market backdrop and the potential for even more customers to be less well served by high street lenders over the months and years ahead, this could prove a really opportune time to launch this new product. We also secured funding from HSBC supported by British Business Bank, so we can finance SME house builders to help them build more homes and resolve the housing crisis. We've continued to expand our reputation as a trusted partner of financial institutions seeking opportunities in the U.K. mortgage market, and we are proud to have attracted more esteem blue-chip names to the ever-growing list of institutions that place their trust in us. In this backdrop, we've achieved a strong growth in both platform AuM and FuM with notable increases of 21% and 23% respectively. Moreover, our net operating income rose by 8%, Michael will talk through the specific details shortly. Our profit before tax was in line with guidance, our earnings per share unchanged. In an effort to reward shareholders, we're pleased to announce that the Board has recommended a 2% increase in dividend. This brings the full year recommended dividend to 4.5p per share, reflecting our commitment to providing value for our investors. Platform AuM increased by 21% to GBP 2.6 billion. This was driven by a 21% increase in buy-to-let platform AuM to GBP 1.8 billion and a 19% increase in short-term platform AuM to GBP 800 million. I'm delighted to see a return to growth for our short-term lending segment, following a stable period since the onset of COVID. This has been driven by our market-leading broker portal for short-term mortgages. In particular, in the current market, this segment is a key driver of our growth, where some landlords are looking to move quickly with purchases to take advantage of the weaker property market. Our key technology project ongoing is building our next-generation buy-to-let portal, which will consolidate all of our lending product offerings onto a single portal and will allow us to establish seamless transitions between our products, which we expect to support AuM growth in the years ahead. On the funding side, we were delighted to grow and diversify our FuM, increasing it by 23% to GBP 3.6 billion. During the first half of the year, we accomplished several key milestones. We established a valuable core funding partnership with Lloyds Bank, which provides additional [ GBP 5 ] to support the growth of our buy-to-let and residential products. We expanded our relationship with J.P.Morgan. We have raised GBP 100 million from HSBC supported by British Business Bank to support SME house builders. We completed our full securitization. We issued our third listed bond. We migrated our real estate opportunity fund to a new structure. We called our first securitization. We sold residuals in our fourth. We've maintained this momentum post year end to recently adding Wells Fargo to expand our buy-to-let offering. BNP Paribas to maintain the current growth trajectory in our short-term mortgage products. And most recently, adding Chetwood Bank as a GBP 500 million separate account partner for our buy-to-let residential mortgages. This partnership, in particular, has allowed us to significantly improve the competitiveness of our products and should allow us to deliver strong growth in fee revenue in H2. As part of our strategic priorities, we have the ambition to increase the proportion of our platform AuM that we manage on behalf of third parties rather than holding on our group's balance sheet. This approach not only reduces the reliance on our balance sheet funding for growth, but it also mitigates the credit risk exposure of the group. This year, we've made huge progress in this regard, and Dave will come on to explain them. I'm now going to hand over to Michael to run through the financials.

Thanks, Rod, and good morning, everyone. Before I go on to discuss the full year results in more detail, I want to take some time to discuss the changes that have been made to the presentation of our P&L for this year's reporting. We've now been a listed business for 2 years and have incorporated feedback to update the presentation of our P&L to enable better comparability of our numbers to our peers in both the lending and asset management sectors. This will also make it easier to understand where income is derived from loans held on our balance sheet, where income is derived from loans originated on behalf of and managed for third parties. Net interest income relates to interest generated from loans held on our balance sheet and is calculated using the effective interest rate method. The behavior patterns of borrowers on the reversion rate is reviewed regularly, and our model assumes on average, that borrowers spend less than 3 months of the reversion rates. For the year ended 31st March 2023, net interest income was 70% of net operating income, but as we have strategically sold portfolios of our loans and the residual interest in our securitizations during and subsequent to the year, I would expect this proportion to reduce significantly in future years. Net fee income largely related to income from third parties. This can include fees recognized where we sell loans, which have been originated on behalf of third party, fees that we received for servicing those loans or management and performance fees related to our Luxembourg real state funds. Additionally, within this category are any fees related to loans on our balance sheet, such as extension fees while loans extend beyond the initial terms. Gains on derecognition of financial assets relates to gains made on loans which have been held on our balance sheet for a period of time or subsequently sold to a third party. Further information on this can be found in Note 1 and Note 6 to 9 of our accounts. As Rod has already mentioned, this has been a challenging year, but we're proud to have delivered in line with our guidance of GBP 14.3 million, whilst also growing our platform AuM since the prior year. Net interest income has increased by 45% to GBP 38.4 million. This is primarily being driven by the increase in our buy-to-let platform AuM by 21% to GBP 1.8 billion as well as increases in lending rates, reflecting an increasing interest rate environment. Net interest income also benefited from a GBP 9.2 million gain recognized as a reduction in interest expense. This related to the call of our first securitization, Mortimer 2019 in September, where the underlying interest rate swaps held in their hedge accounting relationships were broken and the fair value gains recognized in the P&L. This GBP 9.2 million gain offsets other interest expense increases across the buy-to-let portfolio, which were also related to increases in swap rates. Net fee income reduced by 37% to GBP 11.2 million. This was largely driven by a 71% decrease in net fees on origination of loans to third parties. Due to decline in sales to J.P.Morgan taking. J.P.Morgan prices loans from both the lending rate and also securitization markets. Securitization markets were also volatile during the year, so fewer loans met the required minimum income level for sale. Net gains on derecognition of financial assets reduced 22% to GBP 4.9 million. Given the volatile economic backdrop, we originated fewer large structured bridging loans, which would normally have been sold to our Luxembourg real estate funds. Administrative expenses increased by 8% to GBP 34.5 million. This reflects the investment we've made in our people as we built the infrastructure to launch our new residential product as well as increased costs due to high inflation levels. Impairment losses increased by 34% to GBP 5.9 million. Over 90% of this charge relates to 2 legacy defaulted loans as those positions deteriorated materially given the economic backdrop. We have also seen a 25% increase in Stage 2 loans as some borrowers have shown signs of credit deterioration, again, reflecting the increase in interest rates. The increase in impairment charges for these loans was largely offset by impairment releases as loans were derecognized from our balance sheet. Since the year-end, we have completed 2 transactions, which reduced the size of our balance sheet by just under GBP 470 million and the recent completion of a GBP 500 million forward flow agreement with Chetwood will remove a significant amount of credit risk in future earnings. The combination of these factors resulted in a profit before tax figure of GBP 14.3 million, marginally ahead of the prior year figure of GBP 14.2 million. The recent launch of our homeowner product, in addition to the forward flow agreement with Chetwood sets the business up well for future performance and to continue the transition to a capital-light model. I'll now hand over to Rod to give a more detailed strategic update.

Thanks, Michael. Turning now to the strategic update. Our mission is to harness technology to make property finance fast and simple for everyone and to help us deliver on this mission and in particular, to simplify our business for our stakeholders, we've evolved the business into 2 distinct operating divisions, LendInvest Mortgages, which comprises our mortgage products. This includes buy-to-let mortgages, residential mortgages and short-term mortgages. And LendInvest Capital, which comprises our more bespoke property finance solutions, such as development finance or structured property finance. This side of our business also houses our investment products, including our funds and self-select platform. The rationale behind dividing our product offering into these 2 divisions is to bring together the products that share the same characteristics. Across LendInvest Mortgages, we use similar processes for originations, loan management and the technology is consistent to. The underwriters that focusing on this area across trained, across the different types of mortgage products. LendInvest Capital brings together more complex products, bespoke processes and these usually need expert input and people-centric approach. This change will allow us to better communicate to the 2 different audiences and to deliver a higher-quality customer experience for our borrowers, intermediaries and investors. We've launched the sub-brands with the borrowers and intermediaries, and we'll report in these 2 divisions as we move forward. Key to our success in FY '23 has been our ability to respond quickly and creatively to the market conditions. We've set out on this slide some of the ways in which we've responded. I'm not going to run through each of these, but I'm going to pull out a few highlights. As I set out at the start of this presentation, volatile swap rates have made pricing mortgage products challenging and have impacted margins and competitiveness. To counter this, we've constantly diversified our sources of FuM, and we're delighted to have added Chetwood Bank, which is funded by retail deposits as a new separate account partner. In the current market, retail bank funding is materially more competitive than capital markets funding, but that might reverse at some point in the future. Over the last 12 months, for our buy-to-let lending, the most popular 75% LTV 5-year fixed rate products have been averaging 53 or 53rd in the broker sourcing systems and our 2-year product have been even less competitive. Our current positioning with our new funding is 21st for the 5-year fixed and 5th for the 2-year fixed. Unsurprisingly, this has become quite quickly our best-selling product. Another challenge to the property market continues to face is a shortage of housing. This has been a persistent challenge for many years, but with the government having dropped housing delivery targets and with an uncertain market backdrop, fewer development projects are starting, and this chronic undersupply will likely get worse. To actively contribute to the solution, we've secured funding from HSBC with support from British Business Bank to provide competitively priced finance to small- and medium-sized house builders so that they can bring forward their projects and alleviate this housing shortfall. Lastly, we've been challenging ourselves given the access to lending capital that we have, how do we get more volume through the technology that we've built? To address this, we launched a new joint venture called Tradelend. This joint venture where we've partnered with an experienced team providing bridging and development loans opens up our platform to new borrowers and brokers that otherwise would not been able to access our products and it will help us grow our AUM. Going forward, we will consider other joint ventures with trusted partners where collaboration will enable us to tap into previously untapped markets and leverage the expertise and relationships of our partners so that our platform reaches a wider audience. By effectively addressing each challenge, we've demonstrated our resilience and our ability to adapt in a dynamic market environment through diversification, product innovation, strategic partnerships, not only are we overcoming these challenges, but we're also positioning ourselves to continued success in the future. For those of you new to our story, this slide represents the most significant milestone for our business since we launched into buy-to-let lending in 2017, and shows us delivering on a key ambition that we set out in our IPO. We've set out to revolutionize the residential mortgage market. Starting first with specialist residential segment. This is a GBP 100 billion market segment of mortgage borrowers that are not well served by high street banks and building societies. Traditional lenders have typically fixed criteria, and don't accommodate borrowers with unique circumstances on non-traditional sources of income. They often rely on standard income verification methods and they're less willing to consider factors such as self-employment or regular income patterns. Specialist knowledge and expertise is required to understand the unique characteristics of these borrowers. And we've built an origination technology platform design to analyze the specific needs of these customers that allows us to piece together their income profiles. We recently commissioned opinion to conduct a research survey, focusing on self-employed people and key workers. And that survey confirmed the challenges faced by these people in securing mortgages. 30% of key workers and 28% of self-employed people surveyed have been turned down for a mortgage. Our platform provides these customers and their brokers with a slick application fast turnaround times. This month, we completed a loan to a residential borrower for a purchase from inquiry to completion in less than 30 days. By removing the friction for borrowers and brokers, it also reduces the friction for us, and it will provide us with operating leverage as we grow. Following launch in December 2022, and with funding originally from Lloyds and now with Chetwood too, we're really pleased with the progress we've made to date, and we're excited about the future of this product. I fully expect this product to replicate the success we've had in buy-to-let. Our success can be directly attributed to the proprietary technology that we've built. It underpins every platform product and system at LendInvest. I feel confident in saying that we've redefined what was once considered slow,frustrating and manual, streamlining it into seamless and fast experience for our customers. In working towards our vision to revolutionize mortgages, we drive an unparalleled speed to market, fortify risk management capabilities, all of which have been pivotal in propelling our business. Traditionally, customers endure endless paperwork, prolonged waiting periods, bureaucratic red tape. However, we recognize the urgent need to change and embrace digital transformation. Our digital mortgage application process is seamlessly simple. By leveraging proprietary technology, borrowers can now apply for mortgages with ease and efficiency. The results have been incredible. We can complete the whole process in as little as 9 days from start to finish from even the most complex cases. As market conditions fluctuate, we've demonstrated that we can respond rapidly, innovate products like our buy-to-let tracker range proving we can remain agile without compromising on quality. Beyond enhancing customer experience and driving speed to market, our technology plays a central role in automating processes for our customers and strengthening our risk management. Traditional lenders still often rely on manual underwriting processes, which are time-consuming and can leave room for human error. In contrast, we've embraced machine learning. We put large data sets through APIs. We analyze them instantly before presenting those results in a simple screen for our underwriters to understand the case. Our technology is what sets us apart from the competition. It allows us to deliver exceptional products to our customers with unmatched speed while prioritizing high service levels. It's what's allowed us to scale to deliver new innovative solutions for our brokers and borrowers, and it hasn't gone unnoticed, brokers often comment on TrustPilot about our easy application system, quick and simple process. To benchmark our technology and compare it with other lending platforms, we commissioned a top-tier consulting firm to complete a benchmarking review. They commented that our market-leading broker and admin portal, they commented on the best-in-class technology and also, importantly, our excellent track record in delivery, which is important as we continue to build out our technology road map. We also benchmark our capabilities to develop and release software against measures devised by the Google DevOps research and assessment program, where we rank ourselves against other software companies. We consistently rank in the highest category alongside the top 11% of respondents. As we continue to invest in and refine our technology, we remain confident in our ability to build a best-in-class technology to drive sustainable growth and deliver value for our customers. We believe that putting ESG and sustainable lending at the heart of our business model is not just the right thing to do, It's essential for long-term success and beneficial for our shareholders. As part of our ongoing dedication to transparency and continuous improvement, we recently commissioned a comprehensive report to gauge our ESG market positioning compared to other organizations in our industry. And I'm delighted to share that we've emerged as leaders in several crucial areas setting benchmarks for our peers to follow. One of our proudest achievements is our commitment to fostering diversity within our organization at our Board level, diversity exceeds that of our peers and we've made significant strides in addressing a gender pay gap disparities. We're dedicated to ensuring diverse perspectives and talents contribute to our decision-making processes. While we still got a lot to do, we are committed to improving and promoting inclusivity and equal opportunities. Our commitment to Net Zero has been a driving force in shaping our sustainability objectives. I'm thrilled to announce that LendInvest has attained carbon neutrality, a milestone that reflects our ongoing efforts to reduce our carbon footprint. We firmly believe that the finance industry plays a crucial role in combating climate change, and we're determined to be a leader in this transition. We took significant steps towards financing green projects by publishing our Green Bond Framework in November 2022. This framework aligned to the ICMA green bond principles, ensures that proceeds from future green bond issuances will be exclusively channeled towards financing or refinancing loans eligible to green projects to improve the environmental efficiency of the U.K.'s aging housing stock. While we are proud of these accomplishments, we recognize that sustainability journey is a continuous one. Our commitment to ESG principles drives us forward, and we'll continue to focus on these areas in the months and years ahead. I'm now going to pass across to Dave to run through our move towards a capital-light model.

Thank you, Rod, and a very good morning to everybody. And as Rod said, let me close out the strategy update session that I talk about our move towards a capital-light model. This is an important part of the LendInvest long-term strategy where we look to increase the assets that turn the management on behalf of third parties, where we don't have direct exposure to credit risk as a result of that and also our end investors' need to utilize its own capital in support and inline from instructors as well. And I think it's fair to say we've made significant progress in this respect over the last 15 months. Hopefully, you can see that in the charts we've shown on this slide, where the proportion of assets that are managed on behalf of third parties is shown in blue and the proportion of assets that held on our balance sheet is shown in black. So what you can see is, we've reduced the amount of the proportion of assets on our balance sheet from the 57% of March '22 to 45% at the end of March '23. And since the balance sheet date, that's reduced even further down to 30% at the end of June. And the reason for this is because the business has reduced the amount of assets on the balance sheet by over GBP 1 billion over that 15-month period. You can see the transactions on the slide here. But effectively, the main driver of that is the sale of the residual interest in the Mortimer securitization structures. And more recently, there was the sale of a loan portfolio of around GBP 250 million to Chetwood Financial. Now going forward, we expect that proportion of assets on balance sheet to reduce even further in FY '24. The main driver of that will be the forward flow arrangement that both Rod and Michael had mentioned earlier, so GBP 500 million facility. And I'm very pleased to announce that late last night, our Capital Markets team concluded a separate GBP 250 million arrangement with a different third party, which will provide forward flow for our short-term mortgages our bridging loans as well. So with these forward flow arrangements, I mean the commercial arrangements are that we have received upfront fees on the origination of loans under these facilities. And thereafter, we'll earn a servicing fee for as long as the assets remain under management by LendInvest. Key thing there is that there's no direct credit risk exposure and no capital requirement for us, both of which should enhance return on capital employed and long-term shareholder value as well. So we'll move on now to the outlook and the long-term opportunity. And let me start this section by talking about the near-term outlook. So I think as you heard from Rod earlier, the market backdrop we're operating in is pretty tricky at the minute. I think we expect that to remain the case certainly for the near term. However, we expect platform assets under management to increase in FY '24 to similar rate that we've seen in FY '23. That will be mainly driven by the mortgages division, which benefit from the new forward flow arrangements that we just mentioned. So as Rod articulated, this means our competitive positioning particularly for buy-to-let and residential mortgages is strengthened by leveraging a lower-cost retail deposit funding model. And that means that we'll be able to reduce the rates that our borrowers will pay on those mortgages. We also expect the assets under management by our capital division to increase this year as well, although that is partly related or will be partly driven by the need to sort of increase our funding lines for that division and the products that they manage. That's a process that's currently ongoing, and we expect that to deliver benefits in the second half of the year. So from an income perspective, we're expecting the increase in assets under management and the increase in interest rates since the beginning of last year will drive higher overall gross income. However, our funding costs will also increase because of the higher interest rates that we see. And that will mean that net operating income will be more muted as a result. One thing to note on net operating income. Obviously, we'll have a higher proportion of assets that we manage on behalf of third parties. So we see a rebalancing between net interest income, which will reduce in FY '24 as opposed to net fee income, which will materially increase in FY '24. And then the other key point that I'd like to make about the FY '24 results is the performance will be heavily weighted towards the second half of the year. 3 main drivers of this. Firstly is the fact that most of the forward flow funding will be deployed in H2. Secondly, as I referenced before, we expect the capital division to have a stronger second half the year once additional funding has been made available. And thirdly, hopefully, we'll see a more positive economic outlook in second half of this year as well. Overall, though, I think it's fair to say that we're cautiously optimistic that we'll be able to deliver a good result for the whole of FY '24. Let me hand back to Rod and let can cover off the long-term opportunity.

Thanks, Dave. It's been a challenging market backdrop, but we're really pleased with our results and the success we've had delivering on our strategic objectives. I'm proud of the resilience and agility of our team, of our market-leading technology and the great business that we've built. Our best-in-class technology platform provides us with a base from which we can scale and adapt ever-evolving market conditions. And critically, as we grow our business, it will drive significant operating leverage for us, we don't need to hire as many underwriters to grow as other similar organizations. Our access to capital is second to none. We continue to see opportunity to strengthen our platform by adding new funding lines and diversifying and strengthening the capital base of the business. While we expect the macro environment to remain challenging in the short term, we expect it to present opportunities for us. Our business was created in 2008 off the back of bank retrenchment and property lending. We're well positioned today to take advantage of similar opportunities that they present themselves in the months and years ahead. Thanks for listening to our presentation. We're now happy to take questions. So I'll hand back to the operator.

Thank you, Rod. We will now begin the Q&A session. [Operator Instructions] Our first question comes from Gary Greenwood at Shore Capital.

It was just on the move to the capital-light model. I was just wondering if you could remind us what the sort of split is between the upfront fees you get and the servicing fees you get on that business and whether that's changing under the new agreements?