Onity Group Inc (ONIT) 2011 Q2 法說會逐字稿

Welcome to Ocwen's Second Quarter 2011 Results Conference Call. All lines have been placed in a listen-only mode until the question-and-answer session. To ask a question, press star, one. Today's conference is being recorded. If you have any objection, you may disconnect at this time. I will now turn the call over to Mr. John Van Vlack, 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 a slide presentation is available to accompany our remarks. To access the slides, log onto the Web site at www.ocwen.com. Select shareholder relations, then calendar of events, then click here to listen to conference call. Then under conference call, second quarter 2011 earnings, select click here to listen and view slides. Each viewer will be able to control the progression of the slides during the presentation. To move the slide ahead, please click on the gray button pointing to the right.

As indicated on slide two, our presentation may contain certain forward-looking statements pursuant to the Safe Harbor Provisions of federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology that 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 F-3, second quarter 2011 Form 10 and 2010 Form 10-K. If you would like to receive our news releases, SEC filings or other materials via email, please contact Linda Ludwig at linda.ludwig@ocwen.com.

Our presentation also contains references to normalized results, which are non-GAAP performance measures. We believe these non-GAAP performance measures may provide additional meaningful comparisons between current results and results from prior periods. Non-GAAP performance measures should be viewed in addition to and not as an alternative to the company's reported results under accounting principles generally accepted in the United States.

As indicated on slide three, 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. With respect to our second quarter results, revenue and income from operations were up substantially over the second quarter of 2010. As shown on slide four, revenue was up by 39%, driven largely by year-over-year growth in the servicing portfolio. On June 30, 2011 our servicing portfolio was $70.8 billion compared to $55.2 billion on June 30, 2010. Income from operations more than doubled versus the second quarter last year. While most of this growth was driven by increased revenue and economies of scale, it must be added that income in the second quarter of 2010 was depressed by several one-time events. Even adjusting for these, income rose 73% year-over-year. John Van Vlack will cover normalized financial results in more detail later in the call.

Though down from last quarter, we continue to generate strong cash flow from operating activities, over $260 million this past quarter. This allowed us to make the final payment of $26.3 million on our $350 million senior secured term loan. Our proven ability to generate cash has enabled us to finance our acquisition of the Litton Servicing portfolio without issuing new equity. Ron will discuss Litton in more detail later in the call.

The Litton transaction, along with a $2.9 billion subservicing transaction completed in May, are indicators of a robust environment for growth. We will continue to pursue subservicing transactions, the acquisition of existing servicing portfolios and platforms and special servicing opportunities. We are in the midst of several discussions that could result in one or more substantial additional transactions later this year or early next year. In the aggregate, we are currently tracking opportunities exceeding $250 billion of UPB. Regarding flow servicing, Ocwen completed its $15 million investment in Correspondent One. Altisource has invested an identical amount. We do not expect to make further investments. The investments to date will facilitate establishment of warehouse lines and approvals as a seller to Ginnie Mae, Freddie Mac and Fannie Mae. Correspondent one will work with the members of lenders one to become a conduit for newly originated FHA and conforming mortgage loans, affording Ocwen the opportunity to bid on flow mortgage servicing rights. Members of lenders one originated approximately 6% of the residential mortgage loans in 2010. Correspondent one is still in an early stage of development, so we'll likely have a negligible impact on Ocwen's results for new business through the at least year end.

We continued to make progress toward our goal of selling mortgage servicing assets to a new entity, Home Loan Servicing Solutions or HLSS. This is part of our strategy for Ocwen to become an equity-light fee-for-service business. We hope to have HLSS in place in the next several months as it would enhance our ability to fund growth in our servicing portfolio and increase returns on equity. Further information on HLSS is included in the MD&A section of Ocwen's 10-Q, which we anticipate filing by tomorrow. I'll now turn the call over to Ron who will start with a review of the Litton transaction, as well as cover some highlights of our second quarter performance. Ron?

Thank you, Bill. As Bill mentioned, I will first provide a bit more background on our anticipated acquisition of the Litton platform from Goldman Sachs. On June 5th, we entered in to a purchase agreement with Goldman Sachs to acquire all outstanding interest in Litton Loan Servicing. We expect to close the deal on September 1st. The Litton portfolio will increase our servicing portfolio by more than 50% to over $100 billion as we estimate the Litton portfolio will have an unpaid principal balance of approximately $39 billion as of the close date.

Simultaneous with the close of Litton, Ocwen will issue a new $575 million senior secured term loan to fund the acquisition and provide cash for other new business opportunities. We expect the final terms of this loan to be LIBOR plus 5.5% with a 1.5% LIBOR floor and a 2% original issue discount. There will also be transaction fees that will be capitalized and amortized over the life of the loan. Advances on the Litton portfolio are estimated to be approximately $2.4 billion at closing. We have lined up committed non-recourse financing for these two advances for two years at terms approximating LIBOR plus 300 at an 85% advance rate.

In addition, we have been working diligently in conjunction with Goldman Sachs and Litton on the pending transition and as of now, everything is on track. Like the HomeEq transaction we did last year, we expect to incur certain one-time transition related expenses in the third and fourth quarters of this year.

I will now turn to highlights of our second quarter results. More detail is available on today's earning release and our second quarter 2011 10-Q. Slide five shows our HomeEq and Saxon servicing fees and total revenue. As you can see, our collection of deferred servicing fees continues to buoy revenue beyond the 50 basis points contractual rate on both deals. Revenue on both transactions has flattened out and servicing revenue is off a bit from the first quarter of this year. This is primarily a result of modifications falling from exceptionally high levels last quarter.

Slide six reflects annualized servicing and subservicing revenue and expense in basis points for UPB for the past five quarters. Q2 2011 annualized servicing revenue was 66 basis points, reflecting a modest overall decline in revenue from last quarter. Subservicing revenue for the quarter was down to 33.2 basis points. Lower subservicing fees are the result of modifications being off from the prior quarter and the addition of $3.2 billion of new subservicing that's shifted our contract mix. Additionally, any new business takes time to ramp up in ancillary revenue, as you can see from slide five.

Beginning in the second quarter we have seen some fall off in certain process management fees as we aligned with new Freddie Mac and Fannie Mae guidelines that restrict certain fees. The effect was less than 0.5 basis point in the second quarter. The annualized overall impact on revenue of these changes should be 1 to 2 basis points by year end. Normalized pre-tax income for the second quarter of this year was 25.6 basis points on an annualized basis, up 25.5% over the second quarter of 2010. John will discuss the overall company's results in more detail shortly.

As shown on slide seven, we continue our progress in reducing advances. In the second quarter, net advances declined by $226 million. In the past three months we saw continued improvement in our percentage of non-performing loans from 24.7% down to 24.2%, excluding GSE special servicing. This improvement would have been closer to a full 1 point drop had it not been for the highly delinquent subservicing portfolio we boarded in May. Our total modifications for Q2 were 16,825, down from our record high last quarter of 24,502, but still at the high end of our forecasted range. For Q3 2011, we expect total modifications to be between 13,000 and 16,000. HAMP modifications as a percentage of total modifications continue to make up a smaller portion of our overall modifications. In the second quarter of this year, HAMP modifications were 21% of completed modifications for the quarter.

Ocwen continues to develop innovative approaches, such as the recently announced Shared Appreciation Modification or SAM. The purpose of this program is to cure underwater mortgages. In a SAM, Ocwen forgives principal if the borrow remains current on the modified loan for three years and the borrower agrees to share some of the appreciation with the security holder that owns the mortgage if the house increases in value by the time they sell or refinance the home. Ocwen launched the SAM program on a pilot basis in August of 2010. The results of our initial pilot were extremely positive, 79% borrower acceptance rate with only 2.6% re-defaults. Ocwen has since ramped up the program and now has regulatory clearance to make it available to qualified customers in 35 states. We think this program can make a real impact curing delinquent loans to underwater borrowers, and we are working hard to obtain approvals in all jurisdictions.

The SAM program and other foreclosure prevention efforts have garnered substantial support from community groups. We are proud of our leadership in this area because it accomplishes two very important things. First, we help to keep families in their homes, and second, we provide higher returns to our RMBS investors than would be achieved through a foreclosure and REO sales. 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 items impacting our second quarter results which are shown on slide eight. Fortunately adjustments this quarter are relatively minor. First, we incurred about $500,000 in transaction related expenses as part of the Litton acquisition. Second, we incurred $700,000 in incremental amortization of upfront fees and original issue discounts on our senior secured term loan related to the final payment. As shown on slide eight, the net effect of all of the above items is a normalized pre-taxed income from continuing operations was $42.2 million to the second quarter of 2011. That's a 73% improvement over Q2 2010. This improvement is attributable to growth in our servicing portfolio and our ability to reduce delinquencies and unit costs. At the end of 2011, Ocwen maintained $206 million in liquidity, including $104 million of cash and $102 million of unused fully collateralized advanced borrowing capacity.

We feel confident that we have the capital needed to close the Litton acquisition and including future cash flow from operations to fund new business opportunities. Ocwen expects HLSS to file an amendment to its registration statement in the near future.

Thank you. We would now like to open up the call to questions. Operator?

Thank you. We will now begin a question- and-answer session. If you would like to ask a question, please press star, one. You will be prompted to record your name. Please unmute your phone and record your name slowly and clearly when prompted. You may withdraw your request by pressing star, two. Once again, to ask a question, please press star, one. One moment please, for our first question. And our first question comes from Ryan Zucharia of JAM. Your line is open.

Hey guys, I have a couple of questions. First one, amortization was a little bit higher than I had expected. Is that a result of the principal forgiveness programs or the 40 basis points higher CPR? What drove that?

The CPR was slightly higher for the quarter, but just there's a certain amount of fluctuation that happens quarter over quarter. The principal reduction mods are contributing to CPR at the rate of about 2 percentage points annually.

Okay. And can you comment on the B of A subservicing deal that's kind of been rumored where they're going to select a handful of subservicers, each are going to get somewhere between 30,000 and 50,000 loans? Ocwen's name was oddly absent from the list of subservicers that were mentioned. I just want to know if you guys can comment on that.

This is Ron. I'm not sure we can comment on whether we were included or not included. I think we do believe that there is still an opportunity there for us. That being said, we do think that the settlement is going to take quite a long time to develop. It is being objected to by some bond holders and is under investigation by the New York AG. So even after the settlement's final, it should take many months for the whole thing to develop. The fact that it's indicated that subservicers would only get approximately 30,000 loans, also makes it an interesting opportunity, but it's not a huge deal. But I think the fact that we were maybe not mentioned doesn't mean that there still isn't an opportunity for us to participate.

Okay. And Bill mentioned $250 billion of UPB that you guys are tracking, and what's the nature of that, the split between servicing and subservicing and over what time period do you expect that that might come to the market, those opportunities might manifest?

Well, I think many of those opportunities that we're tracking are in various phases of activity as we talk. But since many of the deals are large in size and possibly could involve platforms, as we've seen in the past, those deals can take a fair amount of time to develop. As Bill mentioned in his script, we hope that there's a good opportunity that we could see a large transaction come our way later in the year or early next year. I would say that a big portion of what we're tracking would be on the MSR side. So I'd say it's more on the MSR side than subservicing, but there is -- I don't have the exact percentages available, but there is some subservicing in there as well.

Okay, and then final question, just have you guys had any progress in terms of landing kind of an anchor client for the on-shore operations yet?

At this point, no. We continued to, I think, have a very strong relationship with Freddie Mac, for example, and there could be some opportunities there down the road, but no, at this point we have not committed to anything on that front.

And actually, on final question, sorry about that. Has Ocwen as of now bought any amount, just anything greater than zero in terms of MSRs from Correspondent One?

We have not.

Is anything contemplated for the year 2011?

It will be very, very minor. In 2011, basically, Correspondent One is going to be running effectively test loans through its operating systems. So it would clearly not move the needle.

Right, but the program is getting underway. By 2012 there will be effectively a flow, although potentially small of MSRs from Correspondent One to Ocwen.

We believe that there will start to be a flow at that time. As an independent company, we will be -- we have a relationship with them, but we believe yes, that we will be getting some servicing from them in 2011.

Okay, great. Thanks a lot, guys.

You mean 2012, Bill.

2012, I apologize. Yes, thank you.

And our next question in queue comes from DeForest Hinman of Walthausen & Company. Your line is open.

Hi, I had a few questions. I think historically, there's been some seasonality in the business where you would see some sequential increase in the second quarter relative to the first quarter on the fee and in terms of foreclosures, and then REO sales. Can you kind of comment on what we're seeing? I know there might be some pressures with these regulatory reviews.

There was an increase in the REO related fees in the second quarter relative to first quarter.

If your overall question was, are we selling less REO or foreclosing less because of regulatory reviews, the answer would be no. There is seasonality to, as John said, to REO sales. You would expect in the summer months a pick up in REO sales vis a vis what you would see obviously in the winter months with regard to that. Is that responsive to your question?

No, that's helpful. Can you tell us what the HAMP revenues were in the second quarter?

Yes, $8.6 million, which is the same as in Q1.

Okay. And then you mentioned briefly about a change in some of the process fees that you can charge to Freddie. Can you just say that one more time? And I think you said 2 basis points, but is that on an annualized basis or is that on a quarterly basis?

It's not just related to Freddie Mac. Freddie Mac and Fannie Mae have come out with some new guidelines and clarification on certain types of these, particularly related to what's called doc prep fees. And we believe it's best practice to implement changes like that that the GSEs recommend not only for the GSEs, but across the entire portfolio. So we've basically moved in that direction. What we indicated was that we expect the annualized overall impact this year to be between 1 and 2 basis points.

Okay. And you mentioned the HLSS IPO. You said you're going to file an amendment. The S-1 on that deal has been sitting out there for quite some time. Is there a sense that maybe this deal doesn't get done. And if it does not get done, does that change our strategy? Would we look to do some type of spin off of those assets on the MSR side or would we just kind of progress as we have been?

Well, we can't speak for HLSS, but from Ocwen's perspective, we think the deal is likely to get done, and there will be more details about that in the Ocwen 10-Q, which we file by tomorrow.

Okay. Thank you.

And our next question in queue is from Bose George of KBW. Your line is open.

Hey, good morning. The first question I had was just on if there was more capacity to borrow on that $575 million debt issuance you're doing. I'm just curious how much dry powder you have in different ways if acquisitions come up.

The new $575 million senior secured term loan that we expect to issue in conjunction with the closing of the Litton acquisition has an accordion feature, and here's not a cap on that accordion feature. The ability to draw on that accordion feature depends on the ability to show pro forma compliance with the covenants. So you can think about the debt to equity covenant as really being the main driver. So what it means is that you'd be able to use that vehicle or that instrument to borrow more money as you wet additional equity for large acquisitions. Now, that's assuming that an acquisition would take place in the near future, prior to HLSS. HLSS would be expected to provide cash for future acquisitions, and Ocwen also expects to generate considerable operating cash, which could also be used to help fund future acquisitions.

So just to be clear, any incremental borrowing on that facility would require other equity as well, either through capital raise or through HLSS or somewhere else?

Well, it depends on where the covenant values were at the time that you were making that acquisition. But if you were -- if before that had been paid down and the debt equity ratio had come down, then yes, there could be some additional equity required to close a large acquisition.

And for example, if it was right now presumably that you would need the offsetting equity to raise more debt on that.

Depending, for a large acquisition, yes. There will be some liquidity remaining after closing, but and then additional liquidity after closing HLSS.

Okay, great.

But we would not --

And then, just switching to an expense --?

We're not looking to push the envelope on our covenant ratios at all, but we do generate very substantial monthly cash flow. So a couple -- a handful -- a quarter or two makes an enormous difference in the amount of cash we have available for new acquisitions.

Yes, absolutely, makes sense. Thanks. And then, switching to I had a question on expenses. In terms of the expenses after the Litton portfolio, after that's boarded, is the change going to be pretty similar to what we saw in the Barclays portfolio, just scaled up for the larger portfolio at Litton?

I think it will be proportional, yes.

Okay, great. And then, just lastly, on the debt if we just including the 2%, the OID, what's the effect of interest rate on the debt?

Well, that will depend in part on how long the debt is outstanding.

But in terms of when we're modeling it, do we make an assumption that the debt is outstanding for X period of time in terms of how that goes through your income statement?

I don't think we can provide guidance on that because the amounts of the period that that remains outstanding will depend on future acquisitions. But if you were to model it over the full five year period, the cost of the debt would be roughly 1 point or 1.5 above the 7% rate, which is the 550 over LIBOR plus the 1.5 LIBOR floor.

Okay, great. Thank you.

And as a reminder, to ask a question, please press star, one. Our next question comes from Henry Coffey of Sterne, Agee. Your line is open.

Good morning and thanks for delivering such a solid quarter. The servicer advance fee line looks very attractively priced. That's LIBOR plus without a floor for any other related fees?

That's right.

And is that just because it's quote seller financing or was that more of a market bid in your view? It's very attractive and would love to see you get more of that, obviously.

We believe that that is the market. So we've got seller financing, as we disclosed previously. And then, we also have a commitment for third party financing for the majority of the anticipated Litton advance borrowing. And the pricing on both is within the guidance that Ron provided.

Is there a mechanism by which you can look at your other existing debt facilities and quote refinance, restructure yourself to pricing that's more in that line than I know it's been expensive in the past.

Well, part of what you're seeing in the interest expense line for advanced financing is the effect of hedges that we have implemented. So lender hedge accounting where we swap floating for fixed. You're seeing a fixed price that reflected what the LIBOR curve was at the time that we entered those catches.

Right.

So that will ameliorate over time. And we have seen a decrease in the spreads for our advanced financing.

So sort of moving forward, the money's getting more intelligently priced. Now swap break it doesn't really create any gap benefits, does it? I'm only familiar with how it occurs within the REIT box, but if you were to --?

All it does is smooth out the earnings impact that you get to -- to the extent that you can keep the hedge accounting, you get to recognize the interest rate, which would be the average fixed rate at the swap. And that's generally higher than what the equivalent current rate would be today.

And then, as we go to quantify the slow down of your HAMP fees, does this new program that you're involved with does that generate fees to the servicer as well, or is that just going to be sort of a dwindling opportunity as essentially you run out of modifiable loans within the existing servicing portfolio?

Well, a bigger percentage of the HAMP revenue is coming from the continued success fees for the prior HAMP modifications, and that runs for three years. It will pass the end of the time which you would add new HAMP modifications. So it will diminish over tine, but there's still a fair amount of life left in that.

And then, this new program that you've set up, the loss sharing program or the appreciation sharing program, does that have servicer fees tied to it as well?

No, there would be no third party fees that are generated from that program, but with any modification that we do, it does allow us to recoup advances, which is a positive.

Right.

Bring into income any deferred servicing fees that might have been out there due to the delinquency.

Great. Well, thank you very much.

I just want to make a few other comments about the advanced financing costs. We anticipate bringing down the amount of excess financing capacity, which we've mentioned before. There are up front fees on that. So we'll be seeing some benefit from that in the future. I'd also like to point out that our cost of advanced financing is different than what others in our business pay. It's considerably lower.

Thank you.

Our next question comes from DeForest Hinman of Walthausen & Company. Your line is open.

Hi, thanks for the follow up. This is more of a big picture question. Your strategy seems to be different to some extent on the MSR side relative to one of your main soon to be competitors in the space, and also in the S-1 of Nationstar they talk about a pilot program with a GSE where potentially they would start up servicing, subservicing business and then at some point in the future the GSE would buy that business back from them. And it made me think about the fact that you have not pursued much subservicing as one of your competitors, but is there also some risk that even if you did materially increase your subservicing business that at some point in the future that the GSEs would look to take those servicing rights back from you and service them themselves as they become performing loan?

Let's take a look at the market for a moment. The vast majority of subservicing business that has occurred has occurred from two places. One place has been primarily the GSEs and that is in terms of other participants in the industry, been by far the majority of the business that they have received from one of the GSEs. The other part of the business that they've received in subservicing has been effectively HELOC servicing, which one of our competitors and another smaller competitor have had that market almost exclusively to themselves in the past. The primary reason for that is most servicing systems do not handle the advancing of funds sequentially after a mortgage has been originated, which you would see in a HELOC. In other words, you can continue to draw on a HELOC. We, in fact, are adjusting our servicing system to accommodate that feature, and would attempt to compete in that segment of the market by the end of the year.

I guess maybe to ask it a different way. It is potentially that subservicing easy come, easy go or is it a function where the GSE is giving you the servicing on a troubled loan, we modify it and then we get to keep it until that loan is paid off or the loan is refinanced?

Our expectations of the subservicing we receive, we can't comment on other people in the industry, is that we would keep it. Though, you do have less of a contractual right to keep subservicing than you do servicing. Servicing you own. It's yours. Sub-servicing is, in most cases, at the pleasure of the person who owns the servicing, but it's highly unlikely and highly unusual for subservicing to be moved, but clearly it's far more at risk than servicing.

Okay, thank you. That was helpful.

And at this time, we show no further questions in the queue.

Thank you very much everybody. Have a great day.

Thank you for participating in today's conference. You may now disconnect.