Onity Group Inc (ONIT) 2011 Q1 法說會逐字稿

Welcome to the Ocwen Financial First Quarter 2011 results conference call. All lines have been placed on listen only until the question-and-answer session. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the call over to John Van Vlack. Sir, you may begin.

Thank you. Good morning, everyone, and thank you for joining us today. My name is John Van Vlack and I'm the Executive Vice President and Chief Financial Officer of Ocwen. Before we begin, I want to remind you that the slide presentation is available to accompany our remarks. To access the slides, log on to our website at www.ocwen.com, select shareholder relations, then calendar of events, then click here to listen to conference call. Then under conference call first quarter 2011 earnings, select click here to listen and view slides.

As indicated on Slide 2, our presentation may contain certain forward-looking statements pursuant to the Safe Harbor Provisions of the federal securities laws. These forward-looking statements may be identified by references to a future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the Company's actual financial results to differ materially from the results discussed in the forward-looking statements.

For an elaboration of the factors that may cause such a difference, please refer to the risk disclosure statement in today's earnings release, as well as the Company's filings with the Securities and Exchange Commission, including Ocwen's Form S-3, first quarter 2011 Form 10-Q, and 2010 Form 10-K. If you would like to receive our news releases, SEC filings, and other materials via e-mail, please contact Linda Ludwig at linda.ludwig@ocwen.com.

As indicated on Slide 3, joining me for today's presentation are Bill Erbey, Chairman of Ocwen, and Ron Faris, President and Chief Executive Officer of Ocwen. Now we will turn the call over to Bill Erbey. Bill?

Thank you, John. As you may remember from our last call, we were interrupted by a fire alarm in our Atlanta office. We received a few questions after the call wondering why John and I evacuated but our CEO Ron Faris remained in the call. Let me assure you that we do not consider Ron expendable, Ron was in our West Palm Beach office and so was far removed from what turned out to be a false alarm here in Atlanta. With any luck we will be able to avoid any such interruption on today's call.

Now, let's turn to our first quarter results. Revenue and income from operations were up substantially over the first quarter of 2010. With the home equity deal cost behind us, we are realizing the benefits of last year's solid growth in new business.

As shown on Slide 4, revenue was up by 47% and income rose by a healthy 73% over the prior year, in large part because of economies of scale in our business and our ability to reduce delinquent loans. By bringing more loans current in the quarter, we generated over $368 million of cash flow from operating activities. This allowed us to pay down all the $26.3 million of our $350 million senior secured term loan, which enables us to keep the facility available to provide financing for new business.

We retained substantial liquidity and available credits to take advantage of what we believe is an excellent environment for further growth. Regarding growth, in 2011, we will continue to pursue sub-servicing transactions, the acquisition of existing servicing portfolios and platforms and special servicing opportunities. As noted in our press release today, we signed a sub servicing agreement on $3.2 billion of loans that would transfer this month. We are in the midst of several other discussions that could result in one or more substantial transactions this year.

Regarding flow servicing, Ocwen and Altisource each invested $1 million in Correspondent One to facilitate the infrastructure build. This company will work with the members of Lenders One to become a conduit for newly originated FHA and Fannie-Freddie eligible mortgage loans which will [afford] Ocwen the opportunity to bid on servicing rights. Members of Lenders One originated approximately $90 billion of residential mortgage loans in 2010. Ocwen and Altisource each plan to invest an additional $14 million in Correspondent One in the second quarter of this year. Our expectation is that this will be our total investment in Correspondent One. The management of Correspondent One has made progress establishing warehouse lines and changing the necessary licensing and hiring key managers.

Though we expect to close our initial loans this month, please do not expect a large volume of servicing from Correspondent One this year. As to our strategic initiative to become more capital efficient, Ocwen continues to work with Home Loan Servicing Solutions on the asset sale and sub-servicing agreements as part of the proposed transaction that we discussed in our fourth quarter earnings call.

I will now turn the call over to Ron, who will start with the review of the highlights of our financial performance including a deeper dive into our servicing revenues. Ron?

Thank you, Bill. As Bill mentioned, I will cover the highlights of our first quarter results. A more detailed information is available in our earnings release and our first quarter 2011 10-Q which we expect to file by Friday.

Slide 5 shows a continuing ramp of our HomEq and Saxon servicing fee and total revenue. As you can see, our collection of deferred servicing fees has increased our revenue beyond the 50 basis points contractual rate on both deals. In addition, our ancillary fees are trending as anticipated. We expect the total revenue for the HomEq portfolio will average 70 basis points for the year.

Slide 6 reflects annualized servicing and sub servicing revenue and expense in basis points per UPB for the past five quarters on a normalized basis. Q1 2011 servicing revenue, near the bottom on the far right of the chart was 66.8 basis points, reflecting rising revenues on the HomEq portfolio. Sub servicing revenue for the quarter was up slightly to 38 basis points. Normalized pre-tax income for the first quarter of this year was 26.8 basis points on an annualized basis, up 26% over Q4.

John will discuss in more detail the overall Company's normalized Q1 results shortly. Our total modifications for Q1 were a record high 24,502, which is above the high end of the range we forecasted last quarter. HAMP modifications represented 14% of completed modifications for the quarter. For Q2 2011, we expect total modifications to be between 14,500 and 17,500. The projected decline in Q2 in loan modifications is in part driven by the success we have been having in keeping performing loans current, thus eliminating the need to modify.

As another example of Ocwen's strength as a servicer, over the past three months, we've been able to reduce the percentage of non-performing loans 9.5% from 27.3% to 24.7%, excluding GSE special servicing. We've been able to overcome current market challenges as a result of ongoing investments in our technology and innovative approaches with borrowers.

I'm proud of Ocwen's accomplishments as they've helped to keep more families in their homes and reduce losses to investors. As shown on Slide 7, we made substantial progress in reducing advances in the quarter. Net advances declined $294 million, driven in part by our success with modifications.

On the regulatory front, there continues to be news regarding the servicing industry. In mid-April, federal regulators issued consent orders for 14 of the nation's largest bank servicers and two service providers. Ocwen has reviewed the substance of these consent orders and we believe that we are well positioned to comply with the key requirements. While these orders do not apply directly to Ocwen, we believe they are important in two ways. First, elements of the orders may become regulatory standards in the future. Second, because the requirements apply to the largest servicers in the country, they may become de facto standards for those seeking to buy servicing or provide sub servicing.

In this way, we think these orders enhance our ability to source new business as existing servicers seek to either exit the business or eliminate non-core portions of their portfolios, all while the number of strong counter parties capable of complying with the new servicing standards shrinks.

Now I would like to turn the call over to John Van Vlack. John?

Thank you, Ron. I'd like to walk through a reconciliation of the one-time items impacting our first quarter results, which are shown on the last slide.

First, we incurred $11.9 million in incremental amortization of upfront fees and original issue discounts on our senior secured term loan related to the partial pre payment of this loan.

Second, we also reversed $900,000 of litigation accruals related to the Cartel litigation due to a lower than expected final judgment issued by the court.

As shown on Slide 8, the net effect of all of the above items is that normalized net income from continuing operations improved from $34 million in the fourth quarter of 2010 to $45.5 million in the first quarter of 2011.

This improvement is attributable to growth in our servicing portfolio, our ability to reduce delinquencies and unit cost reductions. At the end of March 2011, Ocwen maintained $180 million of liquidity including $129 million in cash and $51 million of unused fully collateralized, advanced borrowing capacity. We mentioned last quarter that our senior secured term loan has a $300 million accordion feature that could be used for future acquisitions.

Based on growth in Ocwen's business and capacity to repay borrowing, we received the market indication that the accordion could be expanded to $575 million or more to acquire mortgage-servicing assets.

Ron introduced John Britti on our last call. It's been a pleasure to work with him on all Ocwen's financial matters as I continue to work on home loan servicing solutions.

Thank you. We'd now like to open the call to questions. Operator?

(Operator Instructions). Bose George of KBW.

Hi, good morning. I had a couple of little things. One, just -- you mentioned you had about the investment in Correspondent One. So, the portion of that that's Ocwen's, so I guess it would be $7 million. Is that just going to be part of operating expenses for next quarter or how will that be accounted?

No, actually Ocwen will have a total investment of $15 million, $1 million we've already put in and the other $14 million we plan on putting in this quarter and similar amount will be invested by Altisource for a total of $30 million. And basically that money is there to support warehouse lines. So it's certainly -- we clearly do not intend to spend all that money in the near future. It's really simply there as the equity for a reasonably substantial warehouse [line] capacity.

We'll be using the equity method of accounting for that investment and are not making any forward-looking statements regarding the earnings for Correspondent One in the second quarter.

Okay, just to make sure I understand. When you use the equity method there, it's basically an investment that you guys are making and that's how it's going to be reflected?

Correct, as opposed to consolidated. We will not be consolidating.

Okay, makes sense. Thanks. And then, just switching to modification, I was wondering, how much of the modification activity reflected the principle reduction program that you are offering?

Bose, this is Ron. I don't have the exact numbers, but as I think we indicated in the fourth quarter, we were starting to -- we continue to enhance our modification programs as well as our modeling and we have rolled out more. So a higher percentage of the modifications are principle reductions than in prior quarters, but I don't have that exact number for you at this point.

Okay, it's all right. Thanks. And then just one last thing. I just wanted to ask about the Aurora portfolio is, I mean I guess there were some press reports that it is in the market and have you guys -- is there any market chatter about that being for sale?

We really can't comment on that.

Okay, thank you very much.

Bob Napoli, Piper Jaffray.

Good morning. I was hoping you could tell me who you got the sub servicing from, the $3 billion?

Unfortunately, we cannot.

Have you been able to penetrate the second GSE yet?

We continue to have productive discussions there, but at this point, we have not brought any business from them yet.

Okay. What is going to be, John, what would be the weighted average cost of debt from -- after you paid down the debt, the line, which was the much higher cost debt, and what are you paying on the advances. So I mean, we should obviously see a massive drop in interest expense but also in the cost of interest, but can you tell me what that is going forward? Because I mean I understand that you hopefully will be making some acquisitions, but what is it now?

So, we have on our balance sheet, $1,377,000 in remaining upfront cost and original issue discount on the senior secured term loan. And that instrument which now has the balance of I think [$26 million something] has several more quarters to run and the interest rate on that is the LIBOR floor of 2% and a premium over LIBOR of 7% for a total [all-in grade] of 9%. And then (inaudible) regarding advance financing, if you re-ask that, I could try to answer that as well.

Right. No, just to -- what I'm trying to get to is the weighted average cost of debt for all of your debt. And so what maybe -- I mean you gave me the one piece, what is it on -- what are you paying on the advance lines right now that you have outstanding, $1.3 billion?

The advance lines, you got to keep in mind are under utilized because we've got excess capacity for growth, we also have, I mentioned the $51 million that was fully collateralized, so we didn't borrow. So, you are going to be looking at something in the mid single digits on advance facilities, although the spreads are lower, there are some [non usage fees] and there are upfront fees that we are paying on spare capacity we are not using, but we would intend to reduce that over time.

And the actual spreads have been coming down with almost every renewal in terms of spreads over LIBOR.

I mean with the performance you guys have had and the low leverage you have, I mean, that accordion line, I mean that seems pretty egregious, the interest rates that you are paying on that and it just seems that?

The interest rate on the accordion is not determined yet, that would be the then market rate at the time that we would issue that accordion. And so we've got indications on the size of the accordion that we would be able to carry as well as indications on the rate and that the rates are substantially lower than the [700 spread and 200] over LIBOR floor. So, we would expect to pay significantly less than that.

Okay. The pipeline, obviously you guys were announced -- were mentioned as a finalist for the Goldman Sachs portfolio. And I know you can't say much about it and you will probably say nothing, but I was wondering I mean has there been anything else publicly on timing for when a decision would be made on that portfolio?

There has been nothing publicly announced on that, the process continues but there's nothing public. Therefore we can't comment.

How much HAMP revenue did you have this quarter?

I will come back to you with that number.

Okay. Correspondent One, do you expect to get any servicing of that? I mean, even miniscule amounts, I mean [just a sign] -- I mean, do you expect to get anything [off of] that this year and then I mean obviously hopefully ramp up next year?

Bob we have nothing in our budget for it. I mean, we are really going to start Correspondent One in a very methodical disciplined way. So, even the amount of product we are going to put through at least initially is not going to be very large. So, I wouldn't start projecting to see any meaningful amount of...

No, I don't want to project anything at all, but I just want to see that it's -- I mean, I want to understand the strategy, have you -- are you set up such that Ocwen can get flow business for FHA product or is that something that's much further down the line?

No, I mean, Ocwen is set up to bid on FHA servicing as it comes -- as it's originated by Correspondent One.

Bob, I've got the HAMP revenue number for you. For Q1 2011, it was $8.6 million.

Alright, thank you.

Mike Randall, Northland Capital Markets.

Yes. Thanks for taking my questions guys. Three questions. One on advances, they dropped by another $294 million, what's [the current] outlook there, or what would point to kind of a normalization? And then secondly, Bill if you could talk a little bit about what you learned last fall from boarding those HomEq loans that you could apply to other deals? And maybe lastly what should we be thinking about in terms of incremental margins on new business that you would add?

I may take the first part of your question. With regard to the expectations for advances in the future, we would expect that the rate of reduction to slow down. Ron had quoted the reduction in the delinquencies on our overall portfolio, which is a strong driver of the advance reduction. And based on the fact that the HomEq portfolio is now performing similarly in many respects to the Ocwen portfolio. The ability for improvement there is perhaps a bit diminished.

Okay.

In terms of learnings, I mean I think the boarding went very, very smoothly and the performance of the portfolio is reflective of that. I mean we came right out of the starting gate basically, it was performing in line with expectations are right on top of our projections for advances and operating costs. So, we were then a couple of percent of what we were projecting on most of the major drivers for that business. So, HomEq performed extremely well.

We had opportunities that we didn't have with some of the other portfolios where we had complete control over the management and execution of that from day one. So, I think that came across very, very well. But margins, and when we price the transactions, some of that's -- obviously some are confidential, but we are not looking for per se margin expansion out of additional business. It will give us a more efficient capital structure, i.e., return on equity should expand just because we are substantially under leveraged at the present time.

Overall though we do continue to look at our business for ways of not only providing higher quality service through technology, but also at the same time to reduce our -- to be able to reduce our operating costs. I mean we find that the more efficient and more effective we are at resolving loans, results in greater currency within the portfolio as well as lower operating costs.

Okay. And maybe just as a follow-up. How would you compare your pipeline of potential future deals today to what it might have looked like a year ago?

I certainly think there is a -- it is a very target rich environment, all these deals however though are just cake walk than one would ever anticipate and there are many twist and turns with regard to it. I mean I view the overall environment [is fall, now] I said this last time, many firms are deciding that servicing is not a core asset to them and they are likely to exit the business.

There is another -- obviously the large firms are servicing this core, but at least and at least three out of the four we've spoken to they've used certain sections of their portfolio as not being core. So, I think they are looking to rationalize those portfolios. So, you are seeing a great deal more activity today I think than we've seen it any time in our, being in the business for two decades.

Got you. And then maybe real quick for John. Did you mention a number that you have in capital available or total liquidity for acquisitions?

I mentioned a total liquidity number of $180 million and so that cash number we would expect to increase over time. But I wouldn't say that all of that is available for acquisitions because we need to hold something back to meet the operating daily cash requirements.

Which you also mentioned in the line.

Right. And then we mentioned a line where the early market indication is that we could [hit a mandy] accordion feature over the senior secured term loan to increase it from $300 million to $575 million or more, and that would be on top of the $108 million of cash and liquidity that we have available.

Great. Thanks guys.

(Operator Instructions). DeForest Hinman, Walthausen & Co.

Hi, I think I just have one question on slide number 5. And I know we've shown how the basis points on the portfolio move up over time. And 50 basis points is kind of that benchmark that you've used in the past, but at the same time there is some variability on a month to month basis. And I was wondering if you could help me understand what causes that, and is there in fact a seasonal aspect to some of the basis points that we earn on those portfolios?

Let me start off. One of the biggest reasons we have that variability is that because our accounting is more conservative than other firms that you will see in the public market. We basically are almost -- we are on the -- almost on the cash basis of recognition, and that is different than many other firms that you (inaudible) but the other firms that you might see within the market. So as our currency goes up and down, whether the portfolio becomes more or less current was in fact effective on a servicing fee that we recognized in a given period for example.

So the number of days in the month could affect that or where the timing of one holiday [set].

Okay, is there any seasonal aspect in a sense that if there is more [REO] transactions we receive potentially more commissions. So, in the summer does it make sense to think that the basis points revenue increases or is that -- am I not thinking about that correctly?

You would see a greater. We would expect generally you will see more home sales in the summer months than you would see in the winter months with regard to that. And in the first quarter you tend to have greater currency within the portfolio -- or the portfolio gets cured more rapidly in the first quarter because of tax refunds. So, I mean if you look what we experienced this past quarter was a pretty precipitous drop in delinquency, and a lot of that related not simply strictly to high modification levels, but also as Ron pointed out the ability to keep performing loans current, i.e., a very strong performance at our early delinquency [oral] rates.

Maybe I didn't ask it correctly, do we receive any type of revenue for when REO transactions are sold?

Yes.

Okay and what line item does that show up in on that kid of sub revenues that we break out for the Ocwen Asset Management business?

That's in the process management fees line.

Okay, thank you.

At this time you have no further questions, sir.

Thank you very much everybody have a great day.

Thank you for your participation, your call has concluded you may disconnect at this time.