UWM buying Two in a $1.3 billion stock deal

UWM Holdings will purchase Two Harbors Investment, a real estate investment trust branded as Two, in an all-stock transaction valued at $1.3 billion.

Under the terms of the agreement, Two shareholders will receive a fixed number of UWM shares at an exchange ratio of 2.33 times. This implies a price of $11.94 per Two share.

UWM's common stock opened trading at $4.81 per share after the deal was announced Wednesday morning. This was down from $5.12 at Tuesday's close.

At the same time, Two opened at $10.84, up from the previous day's close at $9.91. In early trading on Wednesday morning, it did get as high at $11.24 per share, before backing down to $11.09 by 9:50 eastern time. Two is the parent company of mortgage servicer Roundpoint.

"Net/net, we think this transaction makes a lot of sense," Bose George, an analyst at Keefe, Bruyette & Woods, said in a flash note on the deal. "It increases scale in servicing, which is key as the company is bringing servicing in-house."

The additional servicing should also increase the number of leads United Wholesale Mortgage provides its mortgage brokers, plus it will increase recurring revenue, which George said is important for the holding company's dividend.

What this deal means for UWM's float

Finally, it should double UWM's common stock float, which should make those shares "more investable," George said.

Still, post-deal, existing UWM shareholders will own 87% of the combined company. An entity controlled by UWM Chairman, President and CEO Mat Ishbia will hold 71% of that.

Right now, Ishbia beneficially owns over 83% of UWM's common stock, according to a Dec. 10 Securities and Exchange Commission filing. The entity Ishbia controls made a Dec. 15 filing for a sale of 34.4 million shares with an aggregate market value of just under $181 million.

The filing notes a Sept. 15 sale of 38.2 million shares for gross proceeds of $216.6 million.

A chart in the UWM presentation said the float will grow to 27% of market capitalization from the current 16%.

Where will UWM rank among servicers after the deal is completed

On a pro forma basis, the transaction will make UWM the 8th largest servicer in the mortgage business, between its $216 billion portfolio, and Two's $176 billion.

In its investor presentation, UWM said the deal will create over $1 billion of recurring servicing revenue.

"This transaction is a true win for both stockholders and our mortgage broker partners, which is why it makes so much sense," Ishbia said in a press release. "The timing of doubling our servicing book as we bring servicing in-house is the perfect alignment, allowing us to deliver meaningful upside to stockholders and leverage increased cash flow to invest deeper into the broker network."

How did each company perform in the third quarter

In the third quarter, Two reported a net loss to common shareholders of $141.25 million. For the same period, UWM Holdings had GAAP net income of $12.1 billion.

During UWM earnings calls, Ishbia had declared many times that he does not care about mortgage servicing rights values because he cannot control them. These need to be written up or down and so they impact the bottom line under GAAP accounting.

UWM is bringing its servicing in-house and on the ICE Mortgage Technology MSP platform after its former subservicer, Mr. Cooper, agreed to be acquired by Rocket Cos. The deal accelerates this process, UWM said.

Two acquired Roundpoint in August 2022 from Freedom Mortgage at a $10.5 million premium to its tangible net book value. Freedom had only owned Roundpoint for about two years.

"Scale has become more important than ever in the mortgage industry," Bill Greenberg, Two president and CEO, said. "We are very excited to partner with the largest mortgage lender in the country, bringing our expertise in MSR investing and servicing through the Roundpoint platform."

BofA Securities and Greenhill, a Mizuho affiliate, are UWM's financial advisors with Greenberg Traurig as legal counsel. For Two, Houlihan Lokey is the financial advisor and Jones Day is its legal counsel.