Altisource Portfolio Solutions SA (ASPS) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Altisource Fourth (sic) [First] Quarter 2021 Earnings Call.

(Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your host, Michelle Esterman, Chief Financial Officer. Please go ahead.

Thank you, operator. We first want to remind you that the earnings release, Form 10-Q and quarterly slides are available on our website at www.altisource.com. These provide additional information investors may find useful.

Our remarks today include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ. In addition to the usual uncertainties associated with forward-looking statements, the current COVID-19 pandemic makes it extremely difficult to predict the future state of the economy and its potential impact on Altisource. Please review the forward-looking statements -- sections in the company's earnings release and quarterly slides as well as the risk factors contained in our 2020 Form 10-K, which describe factors that may lead to different results.

We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. In our earnings release and quarterly slides, you will find additional disclosures regarding the non-GAAP measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix to the quarterly slides.

Joining me for today's call is Bill Shepro, our Chairman and Chief Executive Officer.

I will now turn the call over to Bill.

Thank you, Michelle. Good morning, and thank you for joining today's call. This morning, I will discuss the progress we are making in our core origination and default businesses, describe the terms of our recently announced agreement with Ocwen and provide a brief overview of our first quarter financial performance.

Turning to Slide 3 and our origination business. We are pleased with the first quarter performance and more importantly, with our long-term prospects. We generated $16.8 million in revenue, which represents 68% growth compared to the first quarter of 2020.

This growth reflects sales wins, greater market penetration with our existing solutions, the rollout of a new employment reseller solution and a strong origination market.

For the full year, we believe we are on track to grow revenue in this business by approximately 40% to 50% compared to 2020, significantly outpacing the MBA's forecast for a 14% decline in origination volume. Growth in our origination business further diversifies our revenue as almost all of our 2021 forecasted origination revenue is from customers other than Ocwen and NRZ and no one customer represents more than 11% of first quarter revenue.

The next couple of slides provide you with an overview of our origination business, business model and growth strategy.

Turning to Slide 4. Altisource is the manager of a 226 member Lenders One mortgage cooperative. As the manager, we offer a suite of solutions designed to help the members improve their profitability and compete against larger and better capitalized mortgage companies. We also provide the members with ongoing educational programs and access to roundtable events and conferences, where the members can interact with other like-minded executives to discuss best practices and other issues impacting the industry. We estimate that the Lenders One members collectively originated approximately 16% of residential mortgages in 2020, representing approximately $610 billion in origination volume.

To give you a better sense of the members scale, if you aggregate all the members origination production, Lenders One would be the largest residential mortgage lender and roughly the same size as the top 3 lenders combined. The growth in market share of the Lenders One members is impressive. Based upon the typical Lenders One members branch office business model, the members originate a greater proportion of purchase mortgages than the large nationwide lenders whose production is more heavily weighted to refi. It is anticipated that purchase mortgage originations will become a greater proportion of total originations in the next several years, benefiting Lenders One members.

In 2020, we grew revenue in our origination business by 46% and anticipate growing by approximately 40% to 50% in 2021. We believe that the medium to longer-term opportunity for our origination business is massive with a forecasted year-end 2021 Lenders One membership base, representing a serviceable market of $5.7 billion.

Slide 5 illustrates our business model. As the manager of the cooperative, our objective is to leverage the collecting -- the collective buying power of the members to improve their profitability and generate revenue for Altisource, primarily through 4 revenue streams.

First, we negotiate better pricing for the members with preferred capital market providers and vendors and participate in the enhanced capital market execution and vendor savings. Second, we resell certain products, including flood certificates, e-closings and verifications at attractive pricing to the members. Third, we establish programs to potentially earn performance-based equity in certain providers that offer products to the members at attractive pricing. Finally, Altisource is a direct provider of solutions, including title insurance and escrow, valuation and fulfillment services and vendor oversight technology.

Slide 6 sets forth our growth strategy for our origination business. We believe there is a massive opportunity to continue to grow by adding more Lenders One members, increasing the capture rate of existing solutions, launching more solutions and evolving to a higher-margin reseller or direct provider for certain solutions.

We believe that our growth strategy creates a very attractive network effect. We're adding more Lenders One members and evolving certain offerings to a reseller or direct provider, affords us greater scale and bargaining power and improves the member's profitability, which in turn, attracts more members.

As an example of the value we bring to the Lenders One members, last week, we signed an agreement with one of the nation's largest retailers to establish a regional pilot program to lease space at its stores to offer loan origination and related services to the retailers customers to our Lenders One members. We're in active dialogue with our Lenders One members to manage these stores and help them generate mortgage leads and close more loans, which we anticipate would help participating members to further extend their successful branch office business model.

In addition to providing what we believe will be attractive mortgage leads to the Lenders One members, we anticipate that this program will enhance customer loyalty for the retailer and generate attractive revenue and earnings for Altisource. If the 10 to 20 store pilot program is successful, the retailer has indicated that it would like to work with us to expand the program nationwide to as many stores for which we have an appetite. We hope to launch the pilot program by the end of the third quarter.

We're excited about the opportunity for our origination business and believe we are just getting started. With our origination business' unique distribution engine and strong growth prospects, we believe this business will be a significant catalyst to create value for shareholders.

We look forward to continuing to update you on our progress.

Turning to Slide 7 and our default business. Last week, we entered into an agreement with Ocwen to extend the term of our services agreement from August 2025 to August '30, expand the scope of solutions to include the opportunity to provide field services, first and second chance foreclosure auctions and title services on Ocwen's FHA, VA and USDA loans, and establish a framework to provide foreclosure trustee solutions in additional states.

Ocwen is an important and strategic customer and we are pleased to enter into this agreement. We also believe that Ocwen's recent capital raise, servicing portfolio growth and anticipated launch of its MSR vehicle will provide Altisource with significant opportunity to grow as Ocwen grows.

As expected, first quarter 2021 revenue in our countercyclical default business was 70% lower than the first quarter of 2020 and 27% lower than last quarter. This was driven by the temporary pandemic-related government measures and other limitations on loan servicers as well as the transition of field services, title and valuation referrals related to one of Ocwen's MSR investors to that investor's captive vendors in the second half of 2020.

According to Black Knight, foreclosure starts and active foreclosure inventory were at record lows in February, as extended foreclosure moratoriums continue to suppress default activity. At the same time, average seriously delinquent loans in the first quarter were 4.1% compared to 1.2% in the first quarter of 2020. We continue to be optimistic that the medium- to longer-term prospects for this business are strong. As we shared with you on our last call and as shown on Slide 8, we estimate that revenue in our default business could grow on a stabilized basis to between $243 million and $397 million, representing 120% to 260% growth, compared to the midpoint of our 2021 revenue scenarios.

At the low end, the forecast assumes a return to the historically low delinquency rates prior to the pandemic. At the high end, the forecast assumed delinquency rates are at the higher December 2020 levels. We anticipate that the default market will stabilize in 2023, when post moratorium foreclosure starts convert to a steady state of foreclosure and REO inflows and sales.

With short-term demand for our default services constrained due to the pandemic-related foreclosure moratoriums and forbearance plans, and the expectation that additional restrictions on servicers may largely prohibit foreclosures to commence until the end of the year, we are leveraging our default offerings to support the single-family investor market. To support real estate investors, we are developing our signature buyer and signature seller programs to provide a suite of solutions to single-family investors.

As you can see on Slide 9, the single-family investor market is much larger than the foreclosure sale market with an estimated 1 million investment homes sold per year, compared to 140,000 foreclosures that became REO in 2019. In addition, the participants in the single-family market use similar offerings to what we provide in the default space. These include real estate brokerage, online real estate home sales and auctions, title and escrow services, home and rental valuation and investment home underwriting and acquisition services.

We believe Altisource is one of the few one-stop shop providers of these services on a nationwide basis. To address the single-family rental market, we are enhancing our hubzu.com and equator.com websites to better support real estate investors.

We're also establishing channel programs intended to drive single-family investors to our suite of services to support the acquisition, management and disposition of investment homes. While we are still early in our development of these programs, we believe they could become a significant contributor and provide greater balance to our real estate business over the entire business cycle.

Turning to our first quarter financial performance. As you can see on Slide 10, we generated $48.1 million of service revenue and negative $8.5 million of adjusted EBITDA. We performed largely in line with our expectations for the quarter.

As discussed, our origination business performed well with revenue growth of 68% compared to the same quarter last year. The default business was impacted by the continuing pandemic and the loss of referrals from certain portfolios subserviced by Ocwen in the second half of 2020. To address the extensions, the foreclosure moratoriums and forbearance plans, we took additional steps designed to reduce our costs in late February.

As a result of these and other measures, we anticipate that 2021 cash operating costs, excluding outside fees and services, should be more than $20 million lower than first quarter annualized costs. This equates to an average of more than $7 million in lower costs for the remaining 3 quarters of 2021.

For additional information on our first quarter financial performance, please refer to the press release and Form 10-Q issued earlier this morning.

We believe we are positioning Altisource as a more diversified company that should return to growth in 2022. Our origination business is demonstrating significant growth with a massive potential runway in front of it. Our default business continues to be temporarily impacted by the pandemic, but we believe that has tremendous upside from the anticipated pent-up demand once delinquent loans begin to move through the normal default life cycle.

And finally, our expansion into the single-family investor market allows us to leverage our existing suite of default services and should further diversify our revenue and earnings streams.

I'll now open up the call for questions. Operator?

(Operator Instructions)

Our first question comes from the line of Mike Grondahl with Northland Capital Markets.

This is Michael on for Mike. Maybe just first on the Ocwen deal. It seems like a nice sort of solution expansion overall. Do you lose any solutions or states or is it just overall net positive there?

Mike, the agreement with Ocwen, actually, we view as very positive. We're adding 5 years term, and we're adding a slew of FHA-related services that we weren't previously providing to Ocwen. Pre-pandemic, those FHA services were generating, I think, roughly $2 million a month of service revenue. Today, obviously, with the pandemic, they're down significantly from there. We just launched some of these services with Ocwen a couple of months ago, and we anticipate growing those quite significantly over the next -- over the coming months. But basically, we've added 5 years to our term, which certainly increases the present value of our relationship with Ocwen.

Got it. And then just since the end of the first quarter, last few weeks here. I think in a news there was a federal judge on the eviction moratorium. Anything new there as far as how that -- how you're looking at that? And that side of business?

Sure. So I think there was a DC circuit court that ruled the CDC eviction moratorium was unconstitutional. That ruling did not address the foreclosure moratoriums.

There are different opinions amongst the circuit courts with respect to the eviction moratoriums, and it looks like it's going to go up on appeal. We're working at Altisource on an assumption that the moratoriums end at the end of June, but that there'll be other measures put in place by the government that essentially or effectively prevent foreclosures from being started till the end of this year.

But over those -- that 6-month period, that loss mitigation work will continue so that going into 2021, that foreclosure process could get back to a more normal operating environment.

Our next question comes from the line of Shachar Minkove with Napier Park.

Can you just talk about how you see liquidity for the remainder of the year? Obviously, if things are starting to pick up, that's a positive going into the fourth quarter. But can you just sort of address your thoughts around cash, et cetera?

Yes. So we ended the quarter with $41 million of cash, and we continue to implement cash savings activities in the first quarter and into April of this year, and that we believe that's going to considerably reduce our EBITDA loss as the year progresses.

Also in the first quarter, typically, working capital uses cash and then in subsequent quarters, it generates cash. And we are also anticipating a pretty sizable tax refund later this year. So we believe we've got adequate liquidity for the year. That said, we're also evaluating some other opportunities to create a cushion. We believe there's some real opportunity to create shareholder value with our origination business, and we're exploring options there. And we're also exploring other ways in which we could create liquidity, which is probably a bit premature to talk about on this call.

Okay...

But I guess, I would just -- yes, I would just add to that. We think the impact from the pandemic is short term. Unfortunately, the pandemic and this investor of Ocwen's that move business away is having an impact on us this year.

But we believe there's tremendous pent-up demand, as we discussed in my prepared remarks in our default business. We've also extended the runway with Ocwen for an additional 5 years and are adding additional services that we may provide to Ocwen. And then our origination business continues to grow at a very rapid pace, and we also believe that has a very long runway.

And finally, as we talked about in my prepared remarks, we're also beginning to leverage those tools we've developed for the default space for our signature seller and signature buyer program to support real estate investors. And we think all in all, that will provide for longer-term growth and a more balanced customer base for Altisource.

(Operator Instructions)

Our next question comes from the line of Raj Sharma with B. Riley.

I wanted to -- can you touch upon the single family, the rental opportunity? How much is that -- what does that comprise of your business today? And also -- and what is different in how you're approaching it? But also, how does the marketplace and the default services sort of differ from the rest of the business on the single-family rental?

Great. Raj, yes, thanks for your question. So in the real estate investor space we're -- today, we're developing 2 programs. One is called the signature buyer program and the second is called the signature seller program. In the signature buyer program, we have a couple of channels to drive to business to that suite of services that we provide in the default space, title valuation, online auction, brokerage, et cetera. And so one is, there are those investors that have cryptocurrency, we've created a relationship with a company, where they'll convert that cryptocurrency to fiat, and so we can help crypto investors buy homes, by investment homes, using our suite of services. So that's one channel.

A second channel is we're talking with retail investment advisers, who have customers that are looking to diversify their revenue stream, away from just, for example, the stock market and view real estate as another opportunity in the private markets to make investments. So we're working to establish those channel relationships with retail investment advisers to help their customers buy, manage and ultimately sell investment homes. Then, of course, we're leveraging leads on our website, both on hubzu.com and on equator.com, where we've deployed, you're starting to see some of these improvements to the site where we've deployed some tools that make it easier for investors to evaluate and under -- search for evaluate and underwrite investment homes at a basic level.

And then we can provide the brokerage services, the title services, valuation services, et cetera, to those investors. So those are some of the channels on the signature buyer side. On the signature seller side, what we're doing, Raj, is helping investors, primarily investors, sell their rental homes on both hubzu.com and Equator. And I think in the first quarter, just to give you a sense of some of the progress we made, and we're really just getting going. We signed 26 signature seller agreements, don't hold me to the exact number, but I think we generated about $55,000, $60,000 of revenue in April, representing people -- investors that are selling their homes on Hubzu. And so we're looking to significantly expand that program as well. And then just to give you -- to answer your question about why the pivot here.

If you think about, we were more in the rental space through our relationship with Front Yard Residential, and then we sold back our property management business to them a couple of years ago. And then ultimately, they sold their business and are now private. And so we're now at a point where we're saying, look, we should revisit these suite of services because it's leveraging almost the exact same set of services that we're providing to loan servicers and other investors on the default side. We can now pivot and also provide those services on the investor side, while, in particular, the default market has slowed down as much as it has.

So we view this as a medium- to longer-term opportunity, we're making good progress, but obviously, we're still in the early innings.

Got it. Got it. And then on the Ocwen extension, I think you mentioned that it was a settlement of all issues with part of the -- was this -- I mean this was 4 years ahead of schedule. Can you give some color around that? Does this take care of your -- the -- I guess, the issue that you had with NRZ?

So this is an agreement between Altisource and Ocwen, where we had a disagreement as to whether or not Ocwen had the ability to move services that were covered, what we believe were covered by our agreement to Altisource to NRZ's captive vendor. So this was -- this settles that disagreement by extending the term of our agreement for 5 years. So from August '25 to now August '30 -- 2030. And we've also added FHA services, and we've now started, I think we're getting 10% or roughly 20% of Ocwen's volume, 10% or 20% of Ocwen's volume. I think we're at 20% beginning in April of their FHA field services work and for new foreclosures, their auction work.

But keep in mind, with the pandemic, the volumes are significantly lower than what they would normally be. And then we're working with Ocwen in a very thoughtful manner to continue to expand the scope of services we're providing to them on FHA, up to at least 90% of Ocwen's volume. And then we also have the opportunity, which we have not started yet to add an additional 5 states where we do foreclosure trustee work for Ocwen. And then there's also some opportunities around Ocwen's reverse mortgage portfolio, which we haven't started yet.

(Operator Instructions)

There are no further questions. I will now turn the call back to Bill Shepro for closing remarks.

Great. Thank you, operator, and thank you for joining the call. We appreciate your support and interest in Altisource. Thanks.

Ladies and gentlemen, this concludes today's conference call.

We thank you for your participation. You may now disconnect.