Q3 2021 Altisource Portfolio Solutions SA Earnings Call

Good day, and thank you for standing by welcome to the <unk> third quarter 2021 earnings call.

This time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.

Please be advised that today's conference is being recorded.

Any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Michelle as German Chief Financial Officer. Please go ahead.

Thank you operator, we first want to remind you that the earnings release Form 10-Q, and quarterly slides are available on our website at www Dot <unk> Dot com.

These provide additional information investors may find useful.

March 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 healthy source.

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, and 2021, 10, Qs, which describe factors that may lead to different results. We undertake no obligation to update these statements financial scenarios and projections.

As previously provided are provided herein as a result.

Change in circumstances, 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 <unk>, our chairman and Chief Executive Officer, I'll now turn the call over to Phil.

Thanks Michelle.

And thank you for joining today's call.

Turning to slide three this morning, I will discuss the four reasons, we believe <unk> is well positioned for 2022 and beyond.

First we believe that our default offerings are poised for significant revenue and earnings growth as we returned to a more normal post pandemic operating environment.

Second we are executing on our strategic plan and our originations business and believe this will also be a significant driver for growth.

Third we anticipate that we will generate positive cash flow in the second half of 2022, as we returned to revenue growth on a significantly reduced cost structure.

Fourth the anticipated sale of our equity interest in pointless significantly strengthens our balance sheet by adding an estimated $100 million of cash at closing.

Beginning with our default business on slide four.

Our business has been severely impacted by the pandemic over the last year and a half as foreclosure moratoriums in forbearance plans significantly reduced referrals to outsource.

Wherever we believe he and his insight as we return to a more normal post pandemic operating environment.

The federal government's foreclosure moratorium expired at the end of July and the Cfpb's rules, requiring temporary loss mitigation measures are scheduled to end on January one 2022.

The CFPB rules essentially prohibit foreclosure initiations until January one other than a few exceptions, including those loans that were 120 or more days delinquent prior to the pandemic.

We are beginning to see some of the leading indicators that support our growth expectations.

According to Black Knight third quarter, foreclosure initiations were 28% higher than the second quarter.

But still remained more than 85% lower than the pre pandemic fourth quarter of 2019.

Further third quarter hubs, you referrals were 107% higher than the same quarter in 2020, and ending hubs, who inventory of close to 6200 homes marks our second consecutive quarter of inventory growth.

These increases were partially offset by temporary foreclosure holds on homes impacted by Hurricane Ida.

We expect these positive trends to continue and accelerate in 2022 after the scheduled expiration of the temporary CFPB loss mitigation rules and the Hurricane Idaho related foreclosure holds.

On a stabilized basis revenue in our default business depends on delinquency levels as.

As shown on slide five we estimate that our default business revenue could grow on a stabilized basis to between 227 and $296 million.

At the low end, we assume a return to the historically low delinquency rates immediately prior to the pandemic at the high end, we assume delinquency rates are at the higher third quarter 2021 delinquency levels.

The balance of the countercyclical nature of our default business, we continue to refresh our solutions for the single family rental market as illustrated on slide six.

The single family Investor market is attractive to us because we can leverage many of our existing suite of solutions in the market is more than seven times larger than the Oreo sales market with an estimated $1 million investment homes sold per year compared to 140000 foreclosures that became Mario in 2019.

During the quarter, we updated our equator dot com website and continued to develop our signature buyer and signature seller programs to meet the needs of small and midsized real estate investors that make up the lion's share of this market. While still early we are encouraged by the progress of these programs.

Turning to slide seven in our origination business. The origination business continues to perform well as we execute on our mission to help banks credit unions and independent mortgage bankers improve their profitability.

During the quarter, we are approved by the three national credit repository to act as a credit reporting agency and we executed reseller agreements with five providers of verification fraud and other solutions that are typically order during the loan manufacturing process.

We plan to launch our Tri merge credit offering along with these other reseller solutions in the fourth quarter.

The launch of these offerings and increased adoption of our existing solutions along with the planned growth of the number of lenders one members should support 40% to 50% revenue growth in the origination business. Despite the mba's forecast for a 33% decline in origination volume in 2022.

We believe the lenders one members are well positioned to gain market share in a rising rate interest rate environment as their typical branch office model is more purchase as opposed to refi oriented.

We've included on slides eight through 10, our summary of the origination business.

Slide eight provides a description of lenders one whose members collectively originate approximately 16% of all U S. Residential mortgages slide nine describes the lenders one business model and the manner in which we deliver services to the members slide 10 illustrates the compounding growth opportunity driven by the network effect and improving.

Unit economics.

As I shared with you last quarter, we are evaluating ways to enhance shareholder value with respect to our origination business.

These options may include a potential divesture joint venture third party investment in or other strategic transaction as well as retaining and investing in the business.

There can be no assurance that this exploration will result in any transaction or other actions by us we don't intend to provide updates unless and until we determine that further disclosure is appropriate or required.

Based upon our anticipated return to revenue growth in 2022, we forecast <unk> will generate positive cash flow in the second half of the year on a significantly reduced cost structure.

During the third quarter, we reduced our cash expenses, excluding outside fees and services, which vary with revenue by 6% compared to the second quarter of 2021.

Cash costs, excluding outside fees and services for the nine months ended September 30 were.

Were $40 7 million or 26% lower than the same period in 2020, we continue to take steps to lower our costs by reducing our facilities footprint and investing in automation.

Finally, turning to slide 11, and point to list, our customer journey management SaaS platform.

Last month, we announced that shareholders of point was entered into a definitive agreement to sell point to list for $150 million.

Based on analysis of sorts of 69% fully diluted ownership interest we estimate that we will receive approximately $100 million in cash at closing subject to a working capital adjustment.

We will also receive an additional $3 7 million in cash following the one year anniversary of closing assuming no indemnification claims.

We anticipate the sale of pointless will close before the end of the year and estimate that it will generate a pre and post tax gain of $107 million before any potential reduction of goodwill.

We believe this transaction demonstrates that <unk> is a collection of valuable businesses that may not be fully appreciated by the capital markets <unk> intends to use the estimated $100 million of cash proceeds at closing for general corporate purposes.

I'd like to congratulate and thank the pointless team and wish them. The best in the next phase of pointless evolution.

We are excited about the opportunities in front of US. We believe we are well positioned to grow our origination and default businesses in 2022 and generate positive cash flow in the second half of the year with higher revenue on a significantly lower cost base.

I'll now open up the call for questions operator.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Mike Grondahl with Northland Securities. Your line is now open.

Hey, Bill and Michelle.

Two questions maybe.

First one.

At a high level.

Youre seeing originations next year should grow.

40% to 50% origination revenue.

One or two things are the big driver.

That.

And then.

Secondly, maybe.

You're talking about generating cash in the back half of the year.

Roughly what level of revenue do you need to throw off cash.

Hey, good morning, Mike So let me get to your first question related to the origination growth. So there's a couple of drivers I think we will do roughly a little.

It's not an exact number roughly $60 million.

Maybe a little bit more in revenue in the origination business this year.

We're launching that Tri merge credit product this quarter, we have very significant growth plans for that product.

Two ways, we have an employment a suite of employment verification solutions.

We're going to rollout more wholesome Lee.

Beginning in January of this coming year we.

We anticipate our preferred Investor program, where we help a correspondent buyers.

Get access to the lenders one members origination volume, we anticipate that we'll pick up some this year.

In a market, where there's shrinking volume that will be a more important service to correspondent buyers. So those are three of the areas, where we anticipate a very meaningful growth in.

In the origination business.

Then Mike with respect to your question on cash I mean, we're not going into sort of specific guidance for next year. It is.

Somewhat difficult.

Forecast, because we've never come out of a pandemic before but we're anticipating a very meaningful revenue growth.

Next year and that accelerating as the year progresses. So our fourth quarter. This year, which is typically a seasonally slow we would expect that to be.

Somewhat similar if not slightly down to the third quarter and then as you go into the first quarter, we would anticipate revenue and an EBITDA to begin to improve our EBITDA losses to come down and that will accelerate as the year progresses and just to give you. An example, I was looking at our REO referrals.

In the third quarter of this year, our Oreo referrals were 986 referrals that compares to 365 referrals in the second quarter of 2021, and if you go back to the fourth quarter of 2019, we received 2340 files and that sort of the last full.

Quarter pre pandemic. So if we start getting back to those levels and we don't anticipate stabilizing our Rio to the middle of 2023, you can see in our most profitable business, we're already starting to receive the leading indicators that revenue is going to improve and we're seeing it most and hubs.

As those foreclosure moratoriums ended.

For the for the pre pandemic delinquent loans. So I think that's a great leading indicator it's up significantly in the third quarter, but theres a lot of room for referrals to continue to grow and.

That's going to support that those numbers, we're talking about and help us get to cash flow positive in the second half of the year.

Sure, Yes, it was nice to see a turn in the hubs you inventory too.

Just going back to the origination revenue growth, 40% to 50%.

Is that sort of even if you just dispose or sell off part of the business.

And maybe.

What are you at the beginning.

Of that process of kind of putting the origination business under the microscope at maybe.

Selling off a piece of it or not or at.

At the middle of the process, just kind of where are you.

Sure, Yes, I think Michael we're going to say on the origination processes, we're still going through the evaluation around how best to create shareholder value and we have not made any decisions at this point in time and so beyond what Ive said in our my prepared remarks, where we're still considering our options. Those those list of options, there's not much for me to add.

<unk>, if we were to sell the origination business that revenue I. Just described to you obviously would would go.

Sure.

We do believe we've looked at sort of what <unk> would look like with and without to the origination business. We also believe we would be cash flow positive in the second half of the year. If we sold the origination business, putting aside any potential transition costs related to the to the sale.

Okay.

Got it okay.

We still have not made any decisions and frankly, we're looking at it is what's the best opportunity to create long term share count shareholder value.

Again, if you'd like to ask a question you will need to press star one on your telephone.

Our next question comes from the line of Raj Sharma with B Riley. Your line is now open.

Hi, Good morning, Bill Michelle.

Thank you for taking my questions.

I wanted to just go back to.

<unk>.

Slide you are talking about reduction any reduction so.

Good D potentially stabilized environment on slide five that you are talking about.

Is $2 $27 million of service revenues.

$202 96.

Slide five that was a little higher two quarters ago.

You had stated service revenues would range from $2 40 to $3 96.

Is the outlook on this business changed at all.

I know that two quarters ago, you were basing that on December delinquency rates December 2020, delinquency rates are not basing the potential scenario on Q3 'twenty one delinquency rate has anything changed in your outlook for the default services business.

No Raj I think the only thing that's driving the change in those numbers. It's two things one as you pointed out we're looking at where delinquency rates are today and because they've come down over the last couple of quarters on the right hand column that if you use today's delinquency rates as opposed to where delinquency rates were a couple of quarters.

So that brings down that opportunity to some degree and then in the middle column, the pre pandemic delinquency rates we're using.

With respect to the Ocwen <unk> business, we're using Ocwen current loan count as opposed to end as there as that loan count come came down some the opportunity came down a little bit in that middle column.

So.

That middle column could fluctuate quite a bit depending on what ocwen looks like of course, and then and then where delinquency rates are as the market opens back up.

You also have the gains.

In services, New services that have come on.

On both of you.

Since the beginning of the.

Last two last eight quarters is that still true that the opportunity set.

A rising from from possible full closures in the next.

Year to two years.

In any way changed.

<unk> got no exact gotten worse.

So Raj what I would tell you is in these numbers does not assume any new sales.

Is only based on existing customers correct me, if im wrong, Michelle I think that's the way we're doing this.

So as we close look for the last year and a half as the volumes have been down significantly the default sales has slowed down not only for us, but I think in the industry wide as the market starts to open up again.

We do anticipate that we will be able to grow.

Not only our existing clients, but add new clients and thats not reflected in these numbers.

Got it and then on the cost side I know that you're saying the second half you should be free cash flow positive on the services side.

Yeah.

How should we look at costs our cost looking to go down further from this quarterly rate.

Trying to talk to us a little Yankee.

Yes, the revenue level and maybe model the cost up.

So I do think.

There's a lot of operating leverage in our model so as we grow revenue.

Our revenue, we should not be raising our increasing our cost at nearly the same rate at which we're growing revenue and in addition to that we believe there is some opportunities, particularly on the facility side to bring those costs down probably on a run rate basis by the end of the year.

By the end of next year by another Michel would you say $2 million or close to $2 million.

Yes.

Yes on a run rate basis by one 5% to $2 million.

And we're continuing as we're going through our budgeting process, we're continuing to spend a lot of time to make sure we're running a very efficient operation.

But that's where we see some of the opportunity efficiency improvements.

And bringing down facilities costs.

And then lastly.

Lastly.

Okay.

Sorry, Raj that Michel I don't know, if you had anything to add to that.

For next year, Yes, I think those are the big points. We're also focused on continued automation effort and things like that.

Great and then lastly, what is the <unk>.

0.2, the sale is expected to close at the end of the fourth quarter is that right.

Yes, so we file.

No.

Yes, we filed the HSR applications, we have not had any received any feedback so far and we still believe we're on track to close by the end of the year.

Great. Thank you I'll take my questions offline. Thank you great. Thanks Raj.

Once again, if you'd like to ask a question you need to press star one on your telephone.

I am showing no further questions at this time I would now like to turn the conference back to Dallas Chaparral. Please go ahead.

Thanks, operator, and thanks for attending the call. We appreciate your support thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

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