Sunlight Financial Holdings Inc. (SUNL) on Q1 2023 Results - Earnings Call Transcript
Operator: Greetings. Welcome to Sunlight Financial First Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Lucia Dempsey, Head of Investor Relations. Thank you. You may begin.
Lucia Dempsey: Good afternoon, and welcome to Sunlight Financial's first quarter 2023 earnings call. After the close of the market today, we filed our first quarter 2023 Form 10-Q, announced first quarter 2023 financial results and posted an earnings presentation to our Investor Relations website at ir.sunlightfinancial.com. Before we begin, I'd like to remind everyone that this webcast may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Forward-looking statements include, but are not limited to, Sunlight Financial's expectations or predictions of financial and business performance and conditions and competitive and industry outlook. Forward-looking statements speak as of the date they are made, are subject to risks, uncertainties and assumptions and are not guarantees of performance. Sunlight Financial is under no obligation, and expressly disclaims any obligation to update, alter or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The company also refers participants on this call to the press release issued by the company and filed today with the SEC, the supplemental presentation posted to Sunlight Financial's website and Sunlight Financial's SEC filings for a discussion of the risks that can affect our business. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in both our press release and the supplemental presentation. Joining me today are Matt Potere, Sunlight Financial's Chief Executive Officer; and Rodney Yoder, Sunlight's Chief Financial Officer. Matt will start with an operational performance review of the first quarter of 2023. Rodney will then share additional detail on our financial results before Matt closes with an update on our key priorities for our ongoing success. We'll then open up the call for questions. It is now my pleasure to turn the call over to Matt Potere.
Matt Potere: Thank you, Lucia, and thank you all for joining us. In the first quarter of 2023 Sunlight funded $627 million of solar and home improvement loans, reflecting a 6% increase relative to the first quarter of 2022, or a 12% increase when normalizing for the impact of the solar installer that filed bankruptcy in late 2022. Home improvement volume was particularly strong with $92 million funded in the first quarter of 2023. That's a 20% increase relative to the same period last year. We also funded loans for nearly 16,000 borrowers in the first quarter, demonstrating the sustained demand for solar and home improvement financing overall. We also saw average loan balances continue to grow relative to the first quarter of 2022, with average solar loans up 6% to $47,000, and average home improvement balances up 13% to $19,000. Additionally, we continue to maintain strong relationships with our network of contractors and add new partners to our Orange origination platform, including 41 new solar installers and 32 new home improvement contractors that became active in the first quarter of this year, increasing our total contractor relationships to 2,070, a 30% increase relative to the first quarter of 2022. As previously disclosed, we believe that the new financing arrangements with Cross River Bank as well as other actions we've taken positioned Sunlight to address many of the key issues based in 2022 by enhancing our indirect channel execution, bolstering our liquidity, addressing the maturity of our SVB revolving credit facility, ensuring profitable pricing, rightsizing our expense base and reducing our Contractor Advance Program. I also wanted to take this opportunity to provide an update on our credit performance, which demonstrates that we continue to be an industry leader in credit quality. While we don't hold loans on our own balance sheet, we track the performance of loans originated with our Orange platform that we can ensure high quality credit performance for our capital providers and indirect channel partners. For example, solar loans that Sunlight originated in 2022 had an average credit loss rate of only 77 basis points after 24 months, relative to 162 basis points for similar loans originated by our peers in 2022. This superior credit performance reinforces our dedication to high-quality assets and supports our value proposition for current and future capital providers, providing them the opportunity to earn an attractive risk-adjusted return, which in turn benefits Sunlight's margins. I'd like to now turn the call over to Rodney Yoder, Sunlight's CFO, to discuss the quarter's financial results.
Rodney Yoder: Thanks, Matt. Sunlight generated total revenue of $20.6 million in the first quarter of 2023 relative to $30.1 million in the prior year period. While total funded volume was up 6%, total platform fee loans or solar loans were down 59%, and the proportion of direct to indirect channel loans also decreased. These factors led to a $5.7 million decrease in direct channel platform fees and a $4.9 million decrease in indirect channel platform fees as we only sold a small portion of home improvement indirect channel loans in the first quarter of this year. In the first quarter of 2023, our direct channel platform fee margin was 7.1%, up 180 basis points from 5.3% in the first quarter of 2022, reflecting the impact of pricing actions we've implemented in the last year. Given the April indirect channel loan sale as well as upcoming Backbook Loans sales, we expect negative indirect channel platform fee margins in the near-term. However, thanks to pricing actions we've been implementing since mid 2022, we expect recently approved direct and indirect channel loans to be profitable and improve our platform fee margins later this year. Adjusted EBITDA for the first quarter was a loss of $12.4 million relative to a $7.8 million profit in the first quarter of 2022, and adjusted net income for the first quarter was a loss of $17.2 million or a loss of $0.11 per diluted share, relative to $4.9 million profit or $0.03 per diluted share in the first quarter of 2022. In addition to decreased platform fees, adjusted EBITDA and adjusted net income for the first quarter of 2023 were impacted by higher unsold loan balances at CRB, which increased cost of revenue from higher origination fees, partially offset by increased interest income. While we did not sell any solar indirect channel loans in the first quarter of 2023, we completed the $296 million sale of solar indirect channel loans on April 28, and the associated deferred payments were added to the new term loan as specified in the Cross River Bank agreements. While we are originating new indirect channel loans at CRB's balance sheet, we expect to maintain our unsold loan balances within compliance of the recently executed CRB finance agreements through additional loan sales in the coming months. I'll now turn the call back to Matt to highlight the significant progress we made to address our key challenges from 2022.
Matt Potere: Thanks, Rodney. As just discussed, we're continuing to reduce the balance of unsold loans at Cross River Bank, including the $296 million of solar indirect channel loans that we sold last month. Losses on the sale of the Backbook Loans are supported by the Cross River Bank financing agreements, and we're encouraged by the strong demand we're seeing for our high-quality assets in the indirect channel. With increased funding capacity, lower fees and an extended facility maturity, we are well positioned to originate profitable indirect channel loans. We've also been taking actions since the middle of last year to ensure profitable pricing, including the elimination of a number of unprofitable products and materially raising the interest rate of new loans that are being originated to ensure that they are profitable in both the direct and indirect channels. As a result, we believe the loans we are approving today are profitable. We've also discussed the actions we've taken to right size our expense base to adjust for our full year volume expectations and we believe these will lead to approximately $5 million in annual cost savings. As previously disclosed, we indefinitely suspended our Contractor Advanced Program in March of 2023 to improve the company's risk profile and liquidity position. This enabled us to reduce the total outstanding advances from $86 million as of March 31, 2022 to $18 million as of March 31, 2023. I look forward to providing additional updates on our progress over the coming months as we continue to strengthen our operations and focus on delivering long-term value for our stakeholders. With that, I'd like to turn the call back to the operator for Q&A.
Operator: Thank you. [Operator Instructions] Our first question is from Philip Shen with ROTH MKM. Please proceed.
Philip Shen: Hey guys. Thanks for taking my questions. First one is on the remaining amount of platform fee loans that you have on balance sheet. My guess is you guys have about $450 million left after the April sale of about $300 million. Can you talk through how much more could be sold in Q2 and then also in Q3? And do you expect that to taper to close to zero by the end of the year or do you expect to keep some kind of residual amount there? Thanks.
Rodney Yoder: Thanks, Phil. Appreciate the question. So to your point, we did disclose as of March, the unsold loans of CRB were $764 million. And in April, if we did complete that $296 million sale, reducing the balance of CRB. The balance at the end of the second quarter will reflect that sale and other potential sales that'll be completed partially offset by further funding in that channel. You'll see on Page 10, we've kind of given more detail in a walk of that balance over time. And while we haven't disclosed this specific size of the back book to your point, we have sold over $500 million in the last five months. We believe the back book is pretty well contained and we believe the arrangement of the CRB provides us for the ability to execute on future sales. But we do have very strong demand for these assets. We're very pleased with the pricing actions we've taken and the subsequent profitability of the front book going forward.
Philip Shen: Okay, thank you. And you talked about the margin for the platform fee improving. Can you quantify in anyway how you see that improving over which quarters? Do you think by the end of year this year we could see a normalized level or do you think it takes a little bit longer than that?
Matt Potere: Yes, Phil. Thanks for the question. So we started taking pricing actions in the middle of last year and we started to eliminate low coupon unprofitable products in the middle of last year as well. And we've continued to take actions to improve the profitability. As Rodney mentioned, we think we have the back book well contained and we'll continue to sell off those loans and we think the front book is profitable. And so as the year goes on, you'll see the mix shift away from the back book and toward the front book. And we do think loans that we've been originating recently because of the pricing actions we took, we do believe that they're profitable.
Philip Shen: Okay. All right. Thanks, Matt. I might ask one, it might, you guys this next one might be a little bit the right way of putting it. I'm just going to ask it. I don't mean this to be offensive in any way. So you said in your script, we believed the indirect channel loans that you're originating. You guys think they're profitable now. I'm guessing the one, the loans that were – that are not profitable now in the back book. When you originated them, you also probably thought they were profitable then. Or perhaps that's not true. So if it were the case that you thought they were profitable then, but then they turned out to be not profitable. The fact that you're saying that they're probable today what gives the Street, what can you give the Street confidence around in terms of what might, how it might be different this time? Does that make sense? Thanks.
Matt Potere: Yes, understood. And yes, certainly understand your question. The last year interest rates have increased at nearly unprecedented levels. And so we've seen a very rapid rise in rates, and that's what made that back book unprofitable. That said, we made significant pricing actions, we've eliminated unprofitable products and we're having regular conversations with loan buyers that give us confidence that the loans that were originating today, we believe are profitable.
Philip Shen: Got it. And then on a go-forward basis, once you kind of clean up the back book, what do you expect the duration to be for the loans to be originated and kind of sitting there on your balance sheet as opposed to sold off to third parties? Would you expect a quarter longer? Would you expect it within the quarter? Thanks.
Rodney Yoder: Yes, thanks for the question, Phil. We – as we sell down the back book, we are seeing similar and some potential improvements in loans, pulling through, and getting the PTOs. So, we don't expect any material change in timeframe. But we do expect it be on a regular cadence going forward.
Philip Shen: Okay, great. One last question. I'll pass it on. Can you give an update on your strategic alternatives process, there is some headlines in Bloomberg earlier while getting bought or manage [ph] maybe urging the Board to take some action? So just curious if you could share some detail on that topic? Thanks.
Matt Potere: Yes, sure, of course. While I can't comment on any specific rumor or potential transaction. What I can say is, first, we were very pleased to close the agreement with Cross River Bank. We think it positions the company very well to address the challenges from last year and that agreement aligned to the objectives of the strategic alternatives process. All of that said, the Board continues to consider additional actions that are in the best interest of the company and the best interest of the shareholders as we go forward.
Philip Shen: Okay, thank you both. I'll pass it on.
Operator: Our next question is from Arren Cyganovich with Citi. Please proceed.
Arren Cyganovich: Thanks. I was looking through your 10-K that you put out recently in one of the items listed so that you only had one direct channel capital provider at least at that time. But you did fund $240 million loans in the first quarter. Was that all with one single provider? And what's your capacity to originate and fund direct channel loans on a go forward basis?
Rodney Yoder: Yes, thanks for the question, Arren. Really appreciate the question. As we've talked about in the past, our depository partners continue to tell us that they appreciate the strong credit quality of the loans or the macroeconomic impacts or calls the entire loan to deposit ratios. And so as previously mentioned, we expect to have a higher alliance on the indirect channel. Matt talked about the progress we've made eliminating low coupon products and raising [ph] our loans to generate attractive yields regardless of that channel. We believe the direct channel provides benefits and over time as their balance sheets free up, they'll come back. But at the same time [indiscernible] credit performance. And then we like what we're seeing from a profitability perspective on a go forward basis on the front book.
Arren Cyganovich: I guess from like a forward perspective though, is $240 million, is that possible in the second and third quarters? Or do you expect that, that's going to come down to a much lower level?
Rodney Yoder: Yes. Thanks Arren. We're not providing guidance specifically, but what I would say is that given the pricing changes that we made and the capability – we've signed this arrangement with CRB, we really like that arrangement, and it does provide us the flexibility to sell down our back-book and originate profitable growth on the front book. And so that's where we look – certainly, we'll have a much higher reliance on the direct channel, certainly in the near term.
Arren Cyganovich: Okay. And then, I guess, with respect to Cross River's arrangement, I guess, on Page 17 of your slide deck, you have the loan caps, the various dates. Is that going to be kind of where the maximum is in terms of originations on a quarterly basis as you try to sell down the back-book? And then if your cap is at, say, $400 million at the end of this year, is that essentially kind of a limitation for how much you can produce on a quarterly basis?
Rodney Yoder: Yes. Thanks again for the question. So a couple of things. We definitely will stay in compliance with these balance limits. Keep in mind that is the balance after both originations and sales. And as I mentioned earlier, we're sitting on a cadence where as we originate, we'll be selling loans through that channel. I'd also note that the $400 million can be increased with a small collateral amount of 5%. So I would expect us to be somewhere between that $400 million to $500 million capacity perspective, again, and that will be the balance that would reflect both new originations as well as sales within the quarter.
Arren Cyganovich: Got it. And do you have a hedging program in place yet for new indirect channel originations?
Rodney Yoder: So as we've talked about last year, rates moved and has had an unprecedented speed in magnitude, we've made significant improvement in our pricing, which does provide some protection against interest rates. We'll continue to assess the hedging benefits and associated costs, and we'll evaluate opportunities to mitigate that risk going forward.
Arren Cyganovich: Okay. And then just lastly, you had mentioned some cost savings that you've implemented. What are – what do you view as your kind of run rate operating cost now on a go-forward basis after your cost savings?
Rodney Yoder: Yes. Great question. So we have taken steps, as we've talked about before to reduce our headcount. We've taken actions to address the cost base to align it with the – align the size of the organization with our expected volumes, and we expect about $5 million of annual savings there. So with that we've addressed our Contractor Advance Program there and the pricing actions and with the CRB arrangement, we've got liquidity to deliver profitable loans.
Arren Cyganovich: Okay. Thank you.
Rodney Yoder: Thank you.
Operator: [Operator Instructions] Our next question is from Jeff Osborne with TD Cowen. Please proceed.
Jeff Osborne: Hey great. Good evening. Just a couple of questions on my side. Maybe just picking up on the expense items. I think a couple of quarters ago you had talked about the public company cost of the company being roughly $4 million a quarter. Is that still a good number to use?
Rodney Yoder: Yes. That's – we have continued to look for ways of reducing reliance on third parties. And so the accounting compliance numbers are driving quite a bit of that public company expense, but I think for now that's probably an okay number to use.
Jeff Osborne: Got it. And then is there a way to think about what the indirect platform fee would be on a pro forma basis? Is that with a four-handle, five-handle? I'm just trying to think of as that becomes the majority of the mix; how we should think about the profitability of the loans that you're underwriting today?
Rodney Yoder: Yes, that's going to be – that's going to be a function of the timing of sales and the mix of the back and front book. We're not disclosing and providing guidance. You can look at the December sale that we had of $328 million. We took a loss of $22.3 million. That said, we sold loans in April, and we'll report the impact that had on our income statement when released to the earnings. But as Matt mentioned, we made significant pricing actions, and as that front pulls through, we do expect to see strong profitability in that channel.
Jeff Osborne: I guess I was just trying to get at the front book, excluding any sales of the back book that you're underwater on. Is there a way to think about what the benchmark target is that management is pursuing for new underwritten loans?
Rodney Yoder: Yes. So I think, again, while we're not providing any guidance in particular, we have targeted pricing actions that address the fact that we will be largely relying on the indirect channel to deliver the profitable loans that you would normally see from Sunlight.
Jeff Osborne: Got it. And then I was just curious, maybe for Matt, what the uptake of the no dealer fee loans are? I think you've got, what, 9.5% loan out there with zero dealer fee. Is that something that you're seeing demand for or no?
Matt Potere: So we do have a number of products in both solar and home improvement that do have no dealer fee associated with them. We do certainly see some interest from our contractors. I would say, generally, we still see originations skew towards some lower APR products or lower than the no dealer fee product, but we've taken pretty significant actions, as Rodney mentioned earlier, to eliminate the lowest dealer – the lowest APR products.
Jeff Osborne: Got it. And then the last one I had is just on the $18 million of advances. It's great to see that come down. I think in the Q; you've disclosed that $6 million of it is delinquent by 90 days or more. Is that all with one customer? You also in a separate table breakout the concentration. It looks like there's three or four that are chunkier in size relative to the rest. But is the $6 million in particular that's 90 days delinquent, is that a handful of folks or is that one or installers?
Rodney Yoder: Yes, that's going to be a combination of installers. We can certainly provide more detail if required.
Jeff Osborne: Okay. Thank you.
Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to Matt for closing comments.
Matt Potere: Great. Thank you for all your questions, and thanks, everyone, for joining us today. We're really pleased with the progress that we've made to address the key challenges from 2022. And we're looking forward to generating long-term value for our partners in what we think is a very attractive industry. Thank you all, and have a good evening.
Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
