Altisource Portfolio Solutions SA (ASPS) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Altisource Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Michelle Esterman.

Thank you, operator. We first want to remind you that the earnings release, Form 10-K 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 uncertainty 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.

The inherent uncertainty of the impact of future events on Altisource is also impacted by the timing and extent of Ocwen or NRZ directing referrals of services to providers other than Altisource. Please review the forward-looking statements section 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'll now turn the call over to Bill.

Thank you, Michelle. Good morning, and thank you for joining today's call. Beginning with Slide 3. 2020 was a challenging year for Altisource. Throughout the year, the Altisource team, time and again rose to address unprecedented adversity and have performed well during periods of uncertainty. We focused on factors within our control. We aggressively reduced costs and simplified the organization, continuing these efforts into the first quarter of 2021.

We have 2 strong core businesses, origination and default. Revenue in our origination business grew by 47% in 2020, excluding our construction risk mitigation business that was impacted by the pandemic. And this business is forecasted to grow by 60% in 2021. Our countercyclical default business was adversely impacted by temporary pandemic-related government and servicer borrower relief measures. We believe this is creating a massive backlog that we should begin to benefit from at the start of 2022 after the foreclosure moratoriums and forbearance plans expire.

We anticipate strong default-related revenue growth in 2022, with an acceleration in the second half of 2023 when post-moratorium foreclosure starts convert to foreclosure auctions and REO sales. The second half 2023 acceleration should position us to grow default-related revenue by 120% to 260% compared to our 2021 plan, assuming delinquency rates are between pre-pandemic and December 2020 levels. While we can't predict where delinquency rates will ultimately land, it's worth noting that the recent 11% serious delinquency rate for FHA loans is higher than both the 4% rate before the pandemic and the 9% peak rate during the great financial recession.

FHA loans are characterized by borrowers with lower FICO scores and higher loan-to-value ratios than conventional loans. We believe we have the right solutions and people to help improve outcomes for our customers and continue the strong growth trajectory in our origination business in 2021 and to return to growth in our default-related business beginning in 2022. This morning, I will discuss the performance of our default and origination businesses and our expectations for 2021 and beyond.

2020 was a particularly challenging year for our default-related business for 2 reasons: one, permanent; and the other temporary. From a permanent perspective, during the second half of 2020, one of Ocwen's MSR investors directed it to transition field services title and valuation referrals to that investors captive vendors. We estimate that we generated $88 million of revenue in 2020 from these services on this investor's portfolios. As the transition is largely complete, our 2021 forecast, assumes almost no revenue from these services on this investor's portfolios.

From a temporary perspective, beginning in the middle of March 2020, our default business was severely impacted by the COVID-19 pandemic and associated governmental and servicer actions taken to provide financial relief to borrowers. These measures resulted in the temporary suspension of a significant portion of the services we provide on delinquent loans. We anticipate that these temporary measures will continue until the end of this year and impact the financials of our default business over this period before we begin to see a recovery in 2022. Based upon this assumption and the permanent loss of default revenue that I just discussed, the revenue midpoint of our 2021 scenarios for our default business is $110 million, with adjusted EBITDA margins of 29% before corporate and common costs.

Turning to Slides 4 and 5. To illustrate the 2020 impact to our default business and the opportunity that we believe has merely been deferred, we developed a pro forma estimate of foreclosure starts and sales based upon how the default market operated prior to the pandemic. As of the end of 2020, there are approximately $2.3 million seriously delinquent loans, representing a 4.4% delinquency rate. This compares to approximately 626,000 delinquent loans or a 1.2% delinquency rate at the end of March 2020. In a normal market, we estimate that the 2.3 million seriously delinquent loans would drive approximately 1.5 million foreclosure starts and 500,000 foreclosure sales. However, because of the pandemic relief measures, the 2020 annualized number of post-pandemic foreclosure starts was only 73,000. This represents an 85% decline in 2020 foreclosure starts compared to 2019, which itself was a period of historically low delinquency rates. Assuming the current serious delinquency rate of 4.4% and a normal functioning foreclosure market, 2020 foreclosure starts and sales could normalize by as much as 10x 2020 actual and 3x 2019.

We are forecasting that the pandemic-related borrower relief measures will expire at the end of this year. Following the expiration, we expect demand for our default-related business to increase substantially. This growth should begin in early 2022 with the resumption of pending foreclosures and the commencement of the loss mitigation process on delinquent loans not in foreclosure. Our growth should accelerate in 2023 when post-moratorium foreclosure starts convert to foreclosure auctions and REO sales.

Turning to Slide 6. Beginning with the second half of 2023, and assuming the historically low pre-pandemic delinquency rates and the return of the default market to normal operating conditions, we anticipate revenue in our default business could grow by 120% on an annualized basis compared to our 2021 plan. If serious delinquency rates remain at similar levels as of today, our default revenue could grow by 260% on an annualized basis compared to our 2021 plan.

Slide 7 and 8 provide additional information on how we believe the various cycles of the pandemic are impacting our default business.

Turning to our origination business. In 2020, revenue grew by 47%, excluding our construction risk mitigation business that was impacted by the pandemic. Our growth would have been significantly stronger if we didn't have challenges filling many of our open positions, due to the unprecedented industry-wide demand for origination talent. We expect this demand to abate in the second half of 2021 as origination volumes come down, including the pandemic impacted construction risk mitigation business, we grew 2020 revenue in the origination business to $62 million, representing a 24% increase over 2019.

Our origination business is primarily centered around providing services to the 226 members of the Lenders One mortgage cooperative that we manage. The Lenders One members collectively represent approximately 16% of origination volume. We offer products and services to help the members improve their performance. Throughout 2020, we won business with new customers, gained wallet share with existing customers and added new products to our growing suite of origination services. Based upon this momentum and our sales pipeline, the revenue midpoint of our 2021 scenarios for the origination business is $99 million with adjusted EBITDA margins of 23% before corporate and common costs. This represents 60% growth over 2020 and compares favorably to the MBA's forecasted 23% decline in origination volume.

Our 2019 disposition and exit from noncore businesses also enabled us to focus more attention on services to real estate investors. Here, we're deploying some of the same tools we developed for the default market to the massive mom-and-pop real estate investor market. The real estate investment market has over 1 million real estate transactions per year compared to the 145,000 foreclosure sales in the default market in 2019. The real estate investor market also tends to be much more stable than the default market. Although we are not forecasting significant 2021 growth from this initiative, as we -- as one of a few national providers with end-to-end solutions to support this market, we believe we are well positioned to develop and grow over the medium to longer term.

Turning to our 2021 financial forecast. As you can see on Slide 9, the midpoint of our updated 2021 operating plan targets $210 million of service revenue, $54 million of adjusted EBITDA before corporate and common costs and a $10 million adjusted EBITDA loss after corporate and common costs. This forecast reflects our anticipated reduction in corporate and common costs from approximately $93 million in 2020 to $64 million in 2021, positioning us to improve our adjusted EBITDA margins when the company returns to revenue growth.

For the first time since 2009, we are forecasting that we will generate a greater percentage of revenue from our customers other than Ocwen, NRZ and RESI.

Our 2021 operating plan balances cost reductions related to the short-term macroeconomic impact to our business from the pandemic with the importance of performing well for our customers, supporting the growth of our origination business and maintaining the infrastructure to support what we anticipate will be a substantial increase in demand for our default-related services. We should be in a strong position going into 2022 based upon the structural changes that we are making to our cost base, continued momentum in our origination business and the 2022 return to growth in our default business.

Preliminarily, we forecast 2022 revenue of $270 million to $290 million, representing 35% growth at the midpoint. We forecast 2022 adjusted EBITDA to improve to $25 million to $30 million.

On Slide 10, we provide a summary of the key assumptions that we used in developing our 2021 and 2022 forecast. We are prepared to pivot should the situation improve faster or deteriorate from our current expectations.

While 2020 has been an incredibly difficult year, I am confident that we're building a stronger Altisource with greater customer diversification, longer-term sustainable growth in revenue and earnings and a dedicated and high-performing team. We are demonstrating that we have a fast-growing and valuable origination business and an efficient and scalable default business that can adjust to the current environment and should benefit tremendously once delinquent loans begin to move through the normal default life cycle.

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

(Operator Instructions) Your first question is from the line of Mike Grondahl with Northland Securities.

The first question is just sort of on non-Ocwen, NRZ, RESI revenues. It's been running low $20 million a quarter. How do we -- what's embedded in 2021 for that? Roughly, the mix of revenues from non-Ocwen, RESI and NRZ sources?

Michelle, correct me if I'm wrong, is it Slide 9 that shows the breakdown of -- this isn't between Ocwen and non-Ocwen. But if you look in our default business, Mike, the 99 -- sorry, in the origination business, the $99 million at the midpoint, that's almost completely comprised of revenue unrelated to Ocwen. So our origination business unrelated to Ocwen and NRZ. We do anticipate a little bit of work from Ocwen and NRZ, but it's pretty small.

And then on the default business, Michelle, if you can remind me of the $110 million of default, roughly how much of that was coming from Ocwen and how much from other customers?

Bear with me just a second, Bill.

So we'll get back to you in a minute on that, Mike. But you'll see we still have a significant amount of default revenue from other customers.

And my recollection is, in our default numbers from other customers, it's down a little bit in 2021 because of the pandemic and the origination business is growing by 60% from primarily, almost exclusively from other customers. So the default business from other customers is down a little bit in 2022 due to the pandemic -- sorry, in 2021, and the origination business is growing at about 60%.

So the default is about -- sorry, the default '21 at the midpoint is about 90% from Ocwen/NRZ, keeping in mind that Hubzu revenue with other customers is low because of the moratoriums.

Got it. Bill, that origination revenue growth, would you say that's primarily coming from new customers or deeper penetration at existing customers?

Yes. It's a combination of the 2, Mike. So when you look, we've got these 226 Lenders One members that comprise 16% -- roughly 16% of the mortgage market. And so you have a set of existing products and services that we're selling to those members, and we're adding more members that are buying those products and services. We're launching new products and services and then rolling those out to the members and gaining greater market share.

And we're also developing our business with clients or customers that are outside of Lenders One, some of which are new and some of which are an expansion of services that we provide to existing clients. So for example, we work with a very strong midsized lender household name. We started with doing underwriting work for them, then we added doing certification and insurance. And then now recently, we've added title insurance work. So we're continuing to add more services with our existing clients and also more products that we can sell to our existing clients.

Got it.

Mike, on the question on defaults, I want to correct my earlier statement, about 70%, not 90% is kind of Ocwen/NRZ related.

That's the midpoint. Okay.

Yes, sorry about that.

No. It's okay. Bill, you talked about, I'll call it, costs dropping from $93 million to $64 million. Is that in process? Are you almost done getting to that level? How do we just think about that?

So we made a lot of changes last year. I think you'll see in the press release, our fourth quarter cash costs came down by about $12 million compared to the prior -- the fourth quarter in the prior year. Is that right, Michelle?

That's right. Yes.

And Mike, we did continue to make some -- we are very, very mindful and aggressively managing our costs, and we did make some additional changes in the first quarter. And we think we're now in a good position to achieve the plan for this year.

Got it. Okay. And then just last question. The Hubzu ending inventory. Can that inventory -- that ending inventory get sold over the next few quarters? Or is that really held up with the moratoriums?

No. So what you're seeing in Hubzu is, generally speaking, we had a decent inventory going into the pandemic. In April, May, it was very, very difficult to sell any homes in inventory, and then that really picked up quite significantly in the third quarter. So what's happened, Mike, is our inventory has been coming down as we've been selling the -- so the answer is yes, you can sell inventory, and it has been coming down as we've been selling the inventory.

Now when you have homes that are occupied and there's eviction moratoriums, it's very difficult for buyers to price those homes because they don't know necessarily when those eviction moratoriums will come to an end. So some of the inventory is certainly more difficult to sell than other inventory, but we are able, generally speaking, to sell our inventory.

And then what's happening is the inflows as we talked about in my prepared remarks, they're down by roughly 85% or more of new REO because of the moratoriums. The only thing that's really coming through the system, generally speaking, are vacant and abandoned homes where servicers are continuing the foreclosure process. So it's really coming in at a trickle, and we're working through the existing inventory. And in fact, when you think about 2022, when we get to 2022, our REO inventory will be down some because we haven't stabilized yet on inflow. And that's what I was talking about during my prepared remarks that beginning around the second half of 2023, we expect REO inflows to stabilize, and we get to a more normalized run rate. And that should increase our margins because the REO business that we -- the REO auction business is significantly higher margins than the overall default business margins.

(Operator Instructions) Your next question is from the line of Raj Sharma with B. Riley.

I had -- on the breakdown, I wanted some -- just some detail, if you could please talk to on that. Breakdown in the fourth quarter on field services and Hubzu and then there's one and then sort of the assumptions underlying your '21 and '22 projections of defaults of $110 million. How does that break down between field services and Hubzu?

And I know, Michelle, you mentioned 70-30 ratio for Ocwen and new customers. And is that ratio hold for the new customers as well on the new business as well?

So Raj, on the 70-30 breakdown, that's between -- that's for our default-related businesses, the roughly close to $100 million of revenue we're forecasting for 2021 in our origination businesses, the vast majority of that is from other customers other than Ocwen and NRZ.

In terms of the breakdown between businesses, maybe, Michelle -- I don't have it at my fingertips, and we typically weren't breaking it down by business unit at that level. But if you want to give some rough idea, Michelle, if you have it?

So if you look at our MD&A and compared, we do break out service revenue for field services, marketplace and our mortgage and real estate solutions businesses. So service revenue in the fourth quarter for field services was about $20 million, marketplace was $14.8 million and our mortgage and real estate solutions was about $17 million.

And then going into -- yes. And then your assumption for or...

Sorry, pardon me, mortgage and real estate was about $22 million.

$22 million. And that's for fourth quarter. Now for fiscal '21 and '22 and your assumption, how should we look at the breakdown between service revenues -- a breakdown of service revenue between field and marketplace. Then you have the origination.

Yes. At a high level, Raj, and Michelle, you could -- well, I'm explaining, you can look up what we're forecasting. But at a high level, you're going to see continued pressure on the Hubzu and field service businesses in 2021, for the 2 reasons I discussed. One is the loss of that business from Ocwen on its investor on that portfolio where the investor redirected the services. And two, the pandemic continuing to have a serious impact on referral volumes in both Hubzu and field services. MRES includes both our origination businesses as well as our default businesses. So you have default title, default valuation, trustee, those businesses are going to continue to be impacted.

But the origination title, origination valuation, our fulfillment business and Lenders One, we're forecasting to have very, very strong growth in those businesses for the reasons we just explained.

Right. So I'm just trying to understand of the default-related business of $110 million midpoint in 2021, with the moratorium ongoing, where -- are these foreclosed mortgages that are already in the pipeline in the process that you -- this is -- none of this is the new business coming into -- or the new foreclosures coming into the pipeline?

That's right. Our model, Raj, assumes -- my understanding is the President extended the moratoriums through the end of June, the foreclosure and eviction moratoriums and the forbearance plans, you can now request the 2 additional 3-month periods if you went into forbearance before June of 2020. So that really, even if the moratoriums don't get extended, that really is going to take you to October through December of this year, where our volumes are going to be seriously constrained on the default side. That should then open up beginning in 2022. So our model, Raj assumes on the default business that nothing opens up until the end of this year, beginning of 2022.

And then if you think about -- when you get to a stabilized basis, and this is where it gets really interesting, you get to numbers -- what pages that's -- we have a slide on this. Just a second. I think it's on Page -- Slide 6, Raj.

Yes.

When you get to a stabilized environment, and this is at the point at which you're receiving the new foreclosures that are initiated after the moratoriums end. Those then go through the foreclosure process, they become REO. 6 months later, you're selling the REO. So at that point in which you're stabilized, we could potentially be at $396 million of revenue in our default businesses. At today's delinquency rates or it could be at $242 million if we return to the pre-pandemic delinquency rates. And we think we reached that stabilization in the second half of 2020 -- is it 2023.

And what percentage of that $242 million or $396 million would be marketplace? What would the breakup be between -- breakdown be between field services and marketplaces?

Sure. Michelle, do you have that data?

Yes. Let me go get it.

And just -- I just want to get a sense of.

Yes. Sure.

You're assuming that marketplace then is in full swing.

That's right. When you think about what happened in 2020 with roughly only 70,000 or so foreclosure sales, this business -- the marketplace business has been impacted quite dramatically that should reverse itself once the foreclosure market reaches a stable environment. And at that point, the Hubzu business should be growing quite nicely. And of course, our margins in the Hubzu business are significantly higher than the rest of the business, so that should drive an overall improvement in the margins of the default business and the company-wide earnings.

Got it. And then you usually give new customers added in the quarter. Is that -- can you comment on that? Is there any new customers added?

Yes. So there's no reason why we -- we have a pipeline of something like $210 million of business, a sales pipeline. And from a new customer perspective, we are very active, Raj. And I'd say the fourth quarter was very similar to prior quarters, and we're happy to include that in the appendix if the future. The sales pipeline is quite strong. And we did continue to make very good progress from a sales perspective.

(Operator Instructions) I am showing no further questions at this time. I would now like to turn the conference back to Bill Shepro.

Thank you, operator. Thanks for joining today's call, and we look forward to talking with you again soon. Take care.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.