Q3 2020 Altisource Portfolio Solutions SA Earnings Call

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Good morning, ladies and gentlemen, and welcome to the Altisource third quarter 2020 earnings Conference call. At this time all participants are in the listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

It's a 2019 form 10-K, and first quarter form 10-Q, which describe factors that may lead to different results. We undertake no obligation to update these statements as a result of new information our future events.

During this call we will present, both GAAP and non-GAAP financial measures and our earnings release inquiries slides.

You will find the additional disclosures regarding the non-GAAP measures.

Reconciliation of gap to non-GAAP measures is included in the appendix to the quarterly slide.

Joining me for today call US Bill shop row, our chairman and Chief Executive Officer, I would now like to turn the call over to Bill.

Thanks, Michelle good morning, and thank you for joining today's call.

This morning, I'll provide a brief summary of our third quarter financial performance and updated on our progress to improve our adjusted EBITDA margins and cash flow and an overview of our operating in sales strategy to address the current environment.

Beginning with slide three we are pleased with the progress we are making in a very difficult operating environment.

We increased adjusted EBITDA by eight $5 million in the third quarter compared to the second we are implementing our 2021 operating plan that targets $250 million to $270 million of service revenue and $35 million to $43 million of adjusted EBITDA.

Our operating plan assumes continued COVID-19 related headwinds in our default businesses throughout most of the year.

We also continue to develop and grow our customer base, increasing the tremendous backlog of business, which we anticipate will be available to us in late 2021, and it's a 2022 when we forecast that the default market returns to a more normal operating environment.

Turning to slide for in our third quarter financial performance for the quarter, we generated $85 $4 million in service revenue of $1.4 million adjusted pretax loss and six $4 million of adjusted EBITDA.

Despite the ongoing pressure on our business from the pandemic and Ocwen transition of field services referrals on the NRG Msr's to another service provider adjusted pretax improve by eight 6 million and adjusted EBITDA improved by eight $5 million compared to the second quarter.

The improvement and adjusted pretax an adjusted EBITDA was primarily driven by cost reduction measures taken in the second and third quarters and revenue mix changes with revenue growth in the higher margin marketplace business and a decline in revenue in the lower margin field services business.

Our marketplace revenue grew by 40% is homebuyers returned to the market and our average home sales prices increased by approximately 30%.

Turning to slide five as of September 30th we had $67 million of unrestricted cash and cash equivalents X.

Excluding cash flow changes from the pointless business, which we separated but still consolidate alpha sources unrestricted cash increased by approximately $400000 from the end of June.

We ended the quarter with net debt less marketable securities of $196 $6 million.

As of September 30th we had marketable securities a $32 million, representing our investment in front yard residential.

Based upon front yards recently announced sales for $13 50 per share net desk excuse me net debt less marketable securities as of September 30th would have been $182 million a decrease of $16 4 million.

Since the end of the quarter, we sold approximately 1.6 million shares a front yard for net consideration of $21.1 million.

We will use these net proceeds to reduce our debt.

For a more detailed description of our third quarter financial performance compared to prior periods. Please refer to today's press release and form 10-Q.

As we discuss with you last quarter and is shown on slide six we estimate that are 2021 service revenue will be between 250, and 270 million with adjusted EBITDA of 35 to 43 million at 14% to 16% adjusted EBITDA margins to achieve these results.

<unk>, we developed an operating plan that contemplates reducing the size of our workforce and facilities footprint professional services fees technology costs and other expenses and implementing operating efficiency initiatives. We have begun to work to achieve our savings and believe we are on track to deliver on our plan.

Keep in mind that our 2021 plan assumes that we are under continued pressure on our default related businesses with referrals remaining depressed throughout most of the year to.

To give you a sense of the impact the pandemic has had on our business data from a recent black Knight report shows that foreclosure initiations were 83% lower for April through August of 2020 compared to the same period in 2019.

Despite the 87% growth in the number of non current mortgages in August of 2020 compared to August of 2019.

Turning to slide seven based upon the current timing for the expiration of the federal government's eviction moratoriums and forbearance plans. We are forecasting that the default market will return to more normal operating conditions in late 2021 and into 2022.

And a normal market, we estimate that for every 1% increase in delinquency rates the addressable market for our default related services increases by approximately $700 million.

Based upon the increase in delinquencies since the beginning of the year, we estimate that the addressable market for our services has grown by over $2.5 billion to six $3 billion.

However, because of the foreclosure an eviction moratoriums and forbearance programs, there's a very large backlog of business with.

With our attractive and growing customer base. This should provide alpha source with significant revenue tailwind beginning in late 2021 and into 2022, when we anticipate that the default market is likely to return to a more normal operating environment and.

In addition to anticipated revenue growth with a structural improvements that we are making to our cost base. We believe we also can achieve significant margin expansion.

Alpha sources, one or a few companies with scale that offers a full suite of default an origination related services over the last several years, we have developed a strong customer base that includes many of the largest services in the industry are.

Our pipeline of opportunities is also one of the strongest it's been with Servicers anticipating higher referral volumes as the moratoriums and forbearance plans come to an end.

Turning to slide eight and the progress we are making with customers other than Ocwen NRG in Ramsey.

In a very difficult default environment. We grew revenue from these customers by 11% during the first nine months of 2020 compared to the same period in 2019.

Slide nine provides an update when select customer wins.

During the quarter, we began providing loss mitigation services for a top 10 bank finalize the work to begin receiving field services referrals on a government contract executed a statement of work to expand our auction services for top twenty-five servicer to include foreclosure auctions and were notified by a top 25 nonbank servicer.

They have they were expanding its use of alpha sources field services on its FHA portfolio to an additional 29 states over the next couple of quarters.

We're also focused on developing and growing our origination related businesses, which are benefiting from customer growth and the low interest rate environment. We are doing so by leveraging our role as the manager of the lenders one cooperative to drive additional business out the source, while helping to improve the cooperative members profitability the.

The lenders one members collectively represent approximately 15% of the residential loan originations market and provide provide a tremendous growth opportunity for the firm.

To sum up our strategy going into 2021, our focus is on improving our margins and protecting our liquidity.

Performing well for our customers growing our sales pipeline, capturing a greater share of originations related business and supporting the health and welfare of our employees. We're also making sure that we are well positioned for strong growth when demand for our default related services returns in late 2021 and into 2022.

This growing demand combined with a structural changes we continue to make to our operations should help drive revenue and profitability growth and higher margins in 2022.

We are demonstrating that we have an efficient and scalable business model that can adjust to the current environment and should benefit tremendously once delinquent loans begin to move through the normal default lifecycle.

I will now open up the call for questions operator.

Ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your telephone.

Patch. If your question has been answered are you wish to remove yourself from the queue. Please.

<unk>.

Our first question comes from Mike bundle of Northland Security.

Yeah, Hey, good morning, two things.

Your first maybe talk about the.

The progress you're making on the origination side.

If there's anything to call out there and then maybe secondly.

Any third party wins or.

How is that going in anything ramping up in the.

First part of 2021.

Good morning, Mike.

On originations.

Incredibly strong origination market. This year. Some some are forecasting there'll be up to four trillion dollars of origination volume this year.

That business.

Is working off of is relatively small today, but we are making good progress I think we grow the originations businesses by about 30% Michelle correct me, if I'm wrong from the second to the third quarter.

Okay.

And so we are making progress we have this incredible asset and lenders one.

Where were those members collectively represents about 15% of the U S originations market and we have not done as good a job as we should have over the years leveraging that cooperative to provide our products and services to those members and also to continue to help those members improve their margins. So we.

Continue to believe there's a very large opportunity and are very focused on on that and that will contribute to we believe that will contribute to our growth going into next year. So so we're pleased with the progress we're continuing to add additional origination related services and then rolling those out to the members of lenders one and.

At least in our operating plan for 2021, we expect some significant growth coming coming from those activities.

On the sales pipeline I highlighted a few Mike of our of our sales wins.

We have this government contract that we believe is going to onboard and a month or two that was under protest for the last couple of quarters the protest.

Finally came to a conclusion and we should start seeing referrals that has the potential to be pretty meaningful.

On hubs zoo, we continue have a pretty attractive sales pipeline a prospective clients both on the <unk> side and on the foreclosure auction side. The challenge. There of course is there is no inventory.

If you think about four.

Foreclosure starts they were something like 79000 foreclosure starts in the third quarter of last year and only 15000 foreclosure starts in the third quarter of this year and then when you think about sort of our Rio or completed foreclosures, that's down from 33900 and in the third quarter last year only 61 <unk>.

<unk> this year, so so the inventory available inventories down quite significantly, but we believe.

Just getting that back to a normal environment.

Will be <unk>.

Tremendously helpful to us and.

And if you look at 90, plus delinquency rates I think if you exclude foreclosures there up over 400% so.

So when the market does normalize it presumably it will normalize it delinquency rates that are higher than where they are today and that should provide a tremendous benefit to us, particularly or with our with our current customer base and our sales pipeline.

Got it Okay, hey, thanks a lot.

Thanks, Mike.

Your next question comes from Raj Sharma.

Hello, Good morning, I, just wanted to chat a little about.

Just.

Tiny lifting a moratoriums you estimate the end of this year or the end of the first quarter and.

And then that's it so could you talk a little bit about the timeline of how you get the business such that you are.

Projecting the business to pick up at the end of 2021.

Yeah sure. So right now the federal government foreclosure, an eviction moratoriums extend through the end of this year and even servicers of non-government related loans. We believe are largely following.

Those government moratoriums, even though they may not necessarily be applicable or apply to.

Non government loans.

Then if you think about the fourth so we're forecasting those moratoriums at least as as as of right now to end at the end of this year.

Then you have the forbearance plans, which can extend up to a year and again, we believe both.

It applies the government loans, but also non-government servicers are following similar.

Following a similar approach.

The majority of those forbearance plans were entered into between really late March in July.

Of this year.

And so that's when assuming for those that would take the full 12 months. That's when the vast majority of those will begin to roll off.

And then at that point, you've got to follow the CFPB rules around the loss mitigation activities in the waterfall and so we probably won't anticipate seeing a meaningful amount of meaningful increase until late.

2021 and going into 2022.

We'll see some increase in the second half of next year, but it won't be very meaningful and our forecast until the end of the year.

So.

Your.

Your guidance towards 250 to 70 corporates that pick up only in late 2021.

That's correct.

Right.

Yes, I have a couple more follow on questions.

<unk>.

I know that your statement a 1% increase in.

Nationwide delinquencies needs to about it.

I calculated about 17% rise in your total and the rest of the market is that more than the is that more tied into the overall bleak with you wait or the serious delinquency rate.

And and because the overall rate is being held down right now and so you can expect that to kind of come in line with the seriously cause you right.

Yeah, if you look at <unk> and.

So I think Raj the 90, plus day delinquency rate is up over.

425, I think it's up about 425% if you exclude right.

Loans and foreclosure and it's up I think 300, homey to a stranger, 50% or so including loans in foreclosure.

And it's also up on an absolute basis, I think almost 400 basis points.

And so we think even if it if delinquencies normalize it something lower than this.

Borrowers continue to roll off of their forbearance plans when we get to the end of the government programs, we think delinquency rates will be significantly higher than where they were pre pandemic. If you think back to this time last year delinquency rates were at historic lows, we think.

As the pandemic ends in as little as these programs roll off the governmental programs delinquency rates should be significantly higher even if they just got back to normal.

At those historic lows it presents a large opportunity for us, but that opportunity. We believe will be much greater because we think delinquency rates will be significantly higher than where they were a year ago.

And what do you estimate the they.

About 2.3 to 4 million seriously delinquent mortgages right now what percentage of these do you expect to go into loss mitigation foreclosures.

When we are talking to servicers over the last couple of quarters and at the time, there was probably over 4 million loans.

Loans and the forbearance programs and I think that's really what we're talking about here today, it's about 3 million. The servicers, we're estimating anywhere from 25% to 50% of those borrowers may.

May end up in some form of loss mitigation and I think thats still is a reasonable.

Assessment today.

Okay, Great I'll take my question I'll take this offline. Thank you so much.

Thanks for us.

I'm showing no further questions at this time I would now like to turn the conference back to Mister <unk>.

Q operator, thanks for joining today's call and we look forward to talking to you again next quarter excuse me I have a question in queue. If you would like to take it.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful day you may I'll disconnect.

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