LM Funding America Inc (LMFA) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to LM Funding America's First Quarter 2017 Earnings Call. My name Nicole, and I'll be your conference call operator. (Operator Instructions) Joining us for today's presentation will be LM Funding America's Chairman, CEO and Founder, Bruce Rodgers; and Chief Financial Officer, Steve Weclew. Following their remarks, we'll open up the call for your questions.

Then before we conclude today's call, I'll provide the necessary cautions regarding forward-looking statements made by management during this call. I would like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Relations section of the company's website at www.lmfunding.com.

I would now like to turn the call over to Mr. Bruce Rodgers. Sir, please begin.

Good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2017 results. As we do at the beginning of each quarterly conference call, for those new to our story, I'd like to provide a brief overview of our company before getting into financial results.

LM Funding was founded in 2008 when we recognized the need for nonprofit community associations like homeowner associations and condominium associations to better manage unpaid association dues and to secure the funds needed for successful operations. As all homeowners know, if you don't pay your property taxes, the local municipality has the right to issue a tax lien on your property. If your tax continues to go unpaid, they can auction off a certificate representing the tax lien against your property and ultimately take your home. This auction process allows the municipality to monetize their delinquent receivables, which results in municipalities being able to fund their budgets and continue to provide government services. Now if you live in a community association, your elected association's Board of Directors sets a budget and poses assessments on the community residence, which is effectively a tax. In order to provide all the promised association amenities. When too many association fees go unpaid, associations become unable to meet their budgets, and ultimately, they must either levy a special assessment on all the paying residents or cut association services, like closing down the hot tub or pool, or foregoing property maintenance.

If a homeowner or a condo owner doesn't pay their dues, associations have similar lien and foreclosure rights as municipalities. However, unlike municipalities, there was no easy way for associations to monetize these delinquent receivables. They cannot convert them into lien certificates and sell them at auction. The market for this simply does not exist. The only option is to hire a law firm to pursue collections, and traditionally, this has been a very slow, expensive, complicated and inefficient process. In fact, associations are sometimes left with legal bills that are equal to the amounts collected by the law firm, that is, if they're successful in collecting anything at all.

So there's been no easy solution, that is until LM Funding came along. We have established a along and successful track record of returning capital to associations in a highly efficient and successful manner. In fact, we began in 2008, we have had over 12,000 collection events resulting in more than $57 million returned to the approximately 500 associations we have contracted with. We have accomplished this with 2 product offerings that are designed to help associations solve the burdensome problem of delinquent accounts.

Our first product, which we call our original product, provides an association an easy, straightforward way to recover overdue assessments. LM Funding simply purchases from the association all outstanding interests and late fees owed on the delinquent accounts, giving an association immediate financial relief. We then apply our proprietary procedures and software systems to manage and ultimately collect the delinquent assessment, in most cases, return the principal assessment balance to the association.

Our second product, which we introduced in 2013, is called the New Neighbor Guaranty. Our New Neighbor Guaranty provides associations guaranteed funding going forward as we agree to pay the monthly or quarterly assessments for a given delinquent account in exchange for the right to collect all past due assessments. This, in effect, guarantees that the association's budgets are met.

Both of our solutions become particularly attractive when the delinquency rate of an association reaches 2 specific thresholds. First, when an association's overall delinquency rate reaches 8%, banks will typically no longer lend to the association. So if a community needs to borrow money for a new roof, elevator repairs or new asphalt, the bank will not provide financing to cover these basic needs. Their only option is to levy a special assessment on the current paying owners, which, in turn, usually leads to even more delinquencies. Second, when an association's overall delinquency rate reaches 15%, government-backed mortgage lenders will no longer lend to potential home or condo buyers, therefore, requiring potential buyers to pay in cash. As you would expect, this has a very negative effect on real estate prices.

We have found our New Neighbor Guaranty product is particularly helpful in both scenarios as we can virtually guarantee the future budget and, therefore, the creditworthiness of a given associations.

As for our current target markets, we began our operations in Florida in 2008 and continue to make Florida's 48,000 community associations our primary focus. Given our history of approximately 12,000 collection events, we have discovered a certain general formula that has remained fairly consistent, which demonstrates the strong leverage in our business model, that is, for about every $1 we deploy to purchase association debt, we realize a $5 payout at some point in the future, and this number is trending upward.

Certainly, handling hundreds of collection events per year is not an easy task. So a critical part of what has made our business so successful, and the reason we have been able to scale over the years is our proprietary software. This software, which we have developed internally and continually enhance, essentially automates the entire collection process and ensures that all necessary legal documentation is submitted and complete, that all figures are accurate and all state and specific local ordinances are followed as well as it ensures that critical deadlines are met. Altogether, it has put tremendous efficiency, speed, capacity and quality control into a collection process that previously was tedious, time-consuming and subject to human error.

In a way, this support system represents our secret sauce, and we have seen many copycat competitors go out of business over the years because they simply cannot handle the volume of accounting and legal filings like we can.

Our company PowerPoint presentation, which we provide to investors who request it from the Investors section of our website, provides some great examples about how this all works in terms of real numbers. So if you haven't seen it, we encourage you to go have a look.

So now that you have a better understanding of our business model and how it works, I would like to discuss our results for the quarter. Our first quarter was highlighted by the acquisition of 147 delinquent accounts from both new and existing clients. This represents roughly half the delinquent accounts acquired in all of 2016, reflecting a considerable return on our investment of IPO proceeds in sales and marketing strategies.

Revenues for the first quarter of 2017 reflected another slow period of real estate transactions in our target markets, resulting in lower payoff occurrences. However, we are continuing to focus our legal team's collection efforts on higher revenue accounts such as the accounts that do not have a mortgage. I remind listeners that these accounts have returned, on average, $25,000 per payoff. We believe our increased foreclosure capacity should improve the monetization of these accounts throughout the course of the year.

We also continue to realize benefits from our cost-cutting initiative, which was implemented during the third quarter of 2016. This initiative have led to a 27% reduction of operating expenses in the first quarter, and we continue to expect this initiative to drive $2.6 million to $3 million of annual savings.

Before I get into more details, I'd like now to turn over the call to our CFO, Steve Weclew, to walk you through our financial results. Steve?

Thank you, Bruce, and thank you, everyone, for joining us today. For the first quarter of 2017, total revenues were $1 million compared to $900,000 in the fourth quarter of 2016 and $1.6 million in the year-ago quarter. These results reflect a decrease in total payoff events as we collected revenue from 179 payoff occurrences compared to 163 payoff occurrences in Q4 of 2016 and 363 in the first quarter of 2016. The decrease in revenues was offset by a nearly 200% year-over-year increase in rental revenue and a 14% increase in revenue per unit.

Operating expenses in the first quarter of 2017 decreased 27% year-over-year to $1.5 million compared to $2.1 million in the first quarter of 2016 and remained flat compared to Q4 of 2016. As Bruce mentioned earlier, the decrease was driven by our cost-cutting initiative implemented during the third quarter of 2016.

Interest expense in the first quarter of 2017 was $127,000 compared to $164,000 in the year-ago quarter. The decrease in interest expense was due to our balance of debt decreasing as a result of the principal payments we've made over the last several quarters.

Net loss in the first quarter of 2017 was $403,000 or $0.12 per share compared to a net loss of $524,000 or negative $0.16 per share in Q4 2016 and $436,000 or negative $0.13 per share in the year-ago quarter.

Now turning to the balance sheet. At March 31, 2017, we had a total of $1.4 million in cash, which compares to $2.3 million at December 31, 2016. For newcomers to our story, I'd like to point out a few items in our balance sheet that are fairly unique to our business. Our receivables are calculated using the cash recovery accounting method. This means we only account for the dollar amount paid to acquire the delinquent debt, not the actual underlying value of the debt.

For example, at March 31, 2017, our balance sheet shows our original product receivables totaled $1 million. This amount only represents the capital we have deployed to purchase the delinquent accounts. However, our third-party actuarial estimate completed as part of our annual audit estimated the actual fair value of these receivables in terms of what we could potentially collect to be around $7.9 million based on the income approach using a discount rate of 8.45%. For further detail, please see footnote 11 in our 10-K filing.

Also at the end of the first quarter of 2017, our balance sheet showed our New Neighbor Guaranty product receivables totaled $445,000, net of a credit allowance of $104,000. And similar to the original product, the actuarial estimate of the fair value of these receivables at the end of the first quarter were about $1 million using the same discount rate of 8.45%.

Further, given the nature of our business, we often receive title on a property that has delinquent assessments, with this title also having considerable inherent value to consider. But we have to take title and will typically refurbish the property and rent it out. So at quarter end, we controlled about 71 properties compared to 56 at the end of the first quarter of 2016 and 67 in Q4 of 2016.

Our rental revenues for the quarter were up 199% to $165,000 compared to the first quarter of 2016 and up 41% sequentially from Q4.

During the month of March and April, we were able to further monetize our REO portfolio by selling 4 properties, realizing net proceeds of approximately $128,000. This came from a mere investment of $7,000 reflecting the strong economics of our business model. These proceeds do not include the rental revenue we were collecting on these accounts either. As of March 31, we were generating monthly rental income from 92% of our properties compared to 95% at Q4 of 2016.

At March 31, 2017, our balance sheet showed our real estate owned assets were valued at $708,000. Again, this amount is what we paid to acquire and rehab the properties. This represents an average investment of roughly $10,000 per property, and according to Zillow, the gross sales value of those properties totals around $7.5 million at the end of first quarter compared to $7.2 million at the December 31, 2016. This increase in value is not reflected in our financial statement and should be considered when looking at the company's overall performance. So we believe these fairly unique aspects of our business, as reflected in our balance sheet, are important things to consider when evaluating our performance and, particularly, our prospects for realizing the inherent value of the assets we've acquired.

Now with that, I'd like to turn the call back over to Bruce. Bruce?

Thanks, Steve. We remain very excited about this strategic initiative we began late last year to monetize delinquent accounts. For each delinquent account we acquire, part is secured by real property and, therefore, guarantee to pay out sometime in the future, while the remaining amount is unsecured. Our focus and core competency has been and will remain on monetizing the property secured portion of each account. This is why it's equally important to track our acquired delinquent accounts every quarter along with revenue, because each of these accounts ultimately reflects future revenue as an average of 5x the acquisition cost. As I mentioned earlier, the delinquent accounts acquired in the first quarter alone were nearly half of all accounts acquired in 2016.

We've added several new salespeople and taken a new consultative marketing approach to our sales strategy. Simply put, community association boards face a wide variety of problems that all require money to solve. We have trained our sales force to be experts in community association finance and our ability to monetize delinquent community association receivables is a critical piece to the overall health of the community associations' financial position.

It's also worth noting that these acquired delinquent accounts are coming from new and existing clients. We are proud of having helped over 500 communities in Florida by returning over $55 million of delinquent receivables to them. We are now challenging ourselves to reach the other 48,000 community associations in Florida and 330,000 associations in the U.S. that could benefit from our financial expertise and products. I'll remind listeners that in Florida counties, where we have full-time sales staff, we believe there are approximately 100,000 delinquent accounts owing about $500 million. Note that when we deploy approximately $1,000 to acquire a delinquent unit, and on average, it takes 25 months to collect, and throughout our history, we've averaged approximately $5,500 in collections per community association. One of the challenges in this business is predicting when accounts will pay off as we have little control over the speed of the court system and other variables.

We also continue to believe that due to the 2016 decline in the volume of real estate transactions, the accounts that have not paid off at historical rates will pay off in the future and at a higher amount per account since they are all secured by liens against real property and accruing interest of 18% annually.

Through these delinquent accounts, we have also accumulated the rights to collect over $165 million of unsecured debt, which we believe we can monetize by partnering with unsecured collection specialists. As of the end of the first quarter, we've placed $5 million for these assets with an experienced collection specialist. We've also begun perfecting judgments on higher value accounts that should produce additional returns on our current portfolio and create a platform for monetizing unsecured debt on a broader basis.

Although it is hard to put an exact value on what this will mean, we believe these initiatives will generate a significant amount of capital, which will benefit our association clients as well as our company. A 2013 study performed by the FTC estimates that the average portfolio of debt face value goes for about $0.04 on $1, so the impact could be meaningful. And portfolios of perfected judgments transact at much higher rates.

We also continue to believe our proprietary software will enable us to acquire and service this type of unsecured debt on a national basis as most all community associations possess some unsecured debt, and we know of no one else in the business acquiring and servicing it.

As I described earlier, our business model is unique. When the real estate market is hot, prices typically go up, transaction volume increases and delinquencies go down. But revenues go up when our previously acquired accounts come in. On the contrary, when the market cools, prices stay flat, transaction volume falls and delinquencies rise, setting the table for our future growth. As a cash recovery method reporting company, our current revenues are derived from past activity, and our expenses reflect current activity, which should result in revenue that is in line with our experience of $1 deployment yielding $5 in the future.

During the first quarter, Florida real estate market was once again soft in transaction volume compared to the same 2016 period. While this had a negative impact on our results for the quarter, we believe that this macro indicator bodes well for the long-term future of the business as we expect the number of delinquent accounts in the market to start to increase and we lock in our future profits when we buy the accounts.

Now turning to our legal expenses. Subsequent to the quarter, we fully resolved the proposed class action lawsuit by Wilmington Savings Fund Society. The favorable outcome not only validates our company's mission to homeowners associations throughout Florida but will also provide us with monthly litigation expense savings of approximately $45,000. We believe this outcome will set future precedent and validates our company's mission and value proposition to community associations.

We will also continue to fight another class action lawsuit in Miami-Dade County involving the Solaris Condominium Association, where we have appealed a class action certification, which we expect to be ruled upon in the first quarter of 2018. We believe this case is without merit, and we will pursue legal fees from all plaintiffs' parties.

For the remainder of 2017, we will continue to execute on our various growth and profitability initiatives to unlock the value of our company. This includes our strategy to collect from higher revenue generating accounts, continuing to build and monetize both our balance sheet and off-balance sheet assets and maintain a keen focus on our cost-reduction initiatives while building an efficient, scalable operation. And to finance our growth, we will continue to look at debt financing opportunities. We believe LM Funding is in the right place at the right time as the Florida real estate market begins to turn.

Now with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

(Operator Instructions) At this time, this does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Rodgers for closing remarks.

On behalf of the whole entire management team, I'd like to thank our shareholders, employees, clients and partners for their ongoing support. We continue to have an exciting year ahead as we look forward to updating you on our progress next quarter.

Before we conclude today's call, I would like to take the opportunity to remind our listeners that today's presentation and responses to questions may contain forward-looking statements within the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact that were discussed today, including, without limitation, statements regarding the company's future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminologies such as may, will, expects, intends, plans, projects, estimates, anticipates, believes or the negative thereof or any variation thereon or similar terminology or expressions.

The company has based these forward-looking statements on their current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause the company's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors which could materially affect the company's results and future performance include, without limitation, the company's ability to purchase defaulted consumer receivables at appropriate prices, changes in the government regulation that affects the company's ability to collect sufficient amounts of defaulted consumer receivables, the company's ability to employ and retain qualified employees, changes in the credit or capital market, changes in interest rates, deterioration in economic conditions and negative press regarding the debt collection industry, which may have a negative impact on debtor's willingness to pay the debt we acquire, as well as other factors set forth under Risk Factors in the company's filings with the SEC.

Thank you for joining us today for our presentation. This concludes today's call. You may now disconnect.