Q4 2022 Altisource Asset Management Corp Earnings Call
The factors identified in the release and in our filings with the Securities and Exchange Commission. Consequently, you should not rely on these forward looking statements as predictions of future events statements made during this conference call are made as of today's date and the company undertakes no obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
As previously mentioned today's call is being recorded and a link to this webcast will be posted to our website later today with that joining me for today's call is our Chief Executive Officer, Jason <unk>, Jason will provide an update on our fourth quarter and full year 2022 activity review additional corporate developments and present, an overview of our outlook for the year ahead.
We will then open the line for questions Lastly materials for this call can be found in our Investor presentation, which was issued earlier. This morning related information can also be found on the stockholders page of our website at www Dot all source AMC dot com and now I'll turn it over to Jason.
Thank you Danielle.
John You have mentioned is our new Chief operating officer of our alternative lending group, we are extremely happy to have Ron Archie.
She started her career at countrywide and she brings over 20 years of experience across the mortgage and alternative asset industry.
Will be instrumental in helping us to execute transactions across all origination channels and manage relationships with institutional buyers.
Also joining me in this meeting as Steve Carman, our Chief Financial Officer.
Turning to our Q4 financial performance at a high level is as follows.
For the fourth quarter AMC generated a loss of $4 1 million on revenue of $2 5 million I would like to highlight several factors here one revenue improve relative to Q3 by increasing of 600000 or 33% secondly.
Secondly, Q4 included roughly $1 1 million of legal charges branding expenses and other items, we consider to be non recurring.
Three eliminating the special items and adjusted Q4 loss of $3 million was less than the $4 million that we realized in Q3.
Our strategy, which is unique in the industry is that we are a capital light originator of private credit products. These products include both short duration high yielding fixed income assets cured by 1% for single family residential and multifamily residential properties going through value improvements also known as residential <unk>.
Additional loans or RTL.
As well as long duration interest only secured by income producing residential properties also known as the SDR loans such products are distributed to institutions with permanent capital such as insurance companies pension funds endowments 15.
<unk> 15 years of unique experience relationships with these institutions.
Like our peers, we do not use loan securitizations as an exit for our loans instead, we establish individual criteria or a biomarker to sell loans to insurance companies or other funds that are backed by endowments and pension plans. These.
These institutions have large stable cash that needs to be invested in fixed income products.
We then go to market to originate these loans via our three channels directed borrower wholesale broker direct channel.
Backend purchasers must be in place before we can ramp up our origination platform is.
As seen in recent weeks companies with permanent capital such as insurance companies are at a premium unlike banks and firms that depend on the securitization market.
Insurance companies do not have the infrastructure to originate private credit products. Therefore, they look to partner with firms such as ourselves.
Insurance companies pension funds endowments at potentially over a trillion dollars allocated to be invested in alternative fixed income assets.
Alternative fixed income assets, such as ours are an attractive investment opportunity, there's constantly resetting to the market. The typical metrics include <unk>.
Duration originations with a range of 10, 5% to 12% gross weighted average coupon or WAC with a one to two year term.
These assets do not have the same interest rate risks such as those that banks typically deal with with government and agency mortgage portfolios long duration very low yields.
As a reminder, the underlying collateral of short duration notes collateralized by 1% for single family or multifamily residential properties that are going through value improvements.
Turning to our accomplishments.
In Q4, we closed on our second warehouses $50 million warehouse line.
We closed our first forward takeout with a $55 billion plus of money manager that owns an insurance company.
We won an arbitration hearing against our former CEO with a judgment of $1 $6 million plus unpaid interest.
Turning to our Q1 2023 goals and operating standards.
Our expected gross revenue per loan for RTL is at a range between 300 basis points to as high as 450 basis points are.
Our term or <unk> loans have a range between 200 basis points and 350 basis points.
The above ranges reflect the all in annualized revenue expected to be received from originating the loans consisting of origination fees gain on sales and interest strips.
Our focus is originating as opposed to purchasing closed loans.
We are expecting the cost of enquiry I'm, sorry, we are expecting the cost of acquiring a client on a directed borrow channel to be around $500.
For our clients and overtime is spread over multiple loans.
My historical the historical experiences that we can improve cost to capture clients from 500 to 800.
Our expected cost to process a alone is a $160 profile.
This represents a significant competitive advantage due to having our loan production principally in Bangalore, India.
Our expected average loan size for <unk> is approximately 500 K y.
While the expected average loan size for <unk> term loans is 300 K.
As of March 20th we have a pipeline directed borrow channel of originations of $35 million.
And we are in active negotiations with an additional $25 million on top of the $35 million.
As for our wholesale channel, which had a soft rollout on Friday March 17, we have committed volume of $15 million.
We plan to rollout our broker direct channel over the next three weeks.
With that I'll turn the call back to the operator for questions.
Thank you.
I'd like to ask a question you may signal by pressing star one on your telephone keypad.
Once again star one for questions.
We assemble the queue I'll turn the call over to Stephen Carman for pre submitted questions.
Yes.
Yes.
Thank you Katie.
First question we have.
What if any impact have refilled or could we be exposed to in light of the recent crisis of confidence in the U S regional banking sector.
That's a great question, Steve and in this environment, which we've drilled that question. Many times. So we haven't experienced any any issues. We have are takeout partners are permanent capital providers that are not affected by the short term fluctuations in the capital markets are capital partners partners are not dependent upon.
On stable deposits or the securitization market. So thats the beauty of our business model.
Mark it's more clear than ever.
That our product is a hedge.
Our product is short duration high yield and the <unk>.
Buying collateral is improving over the duration of the loan the natural hedge in a rising rate environment. Unlike the low yield long duration agency mortgages that are causing banks to be under severe stress.
If they're not perfectly hedged.
And second quick question.
Yes, we have one additional question have we lost access to any lines of credits that we had previously negotiated for.
No actually.
Flagstar.
Owned by near Accumulative Bank reach out to us about increasing our line if you've seen the and the news New York Community Bank, which owns flagstar acquired the deposits from signature bank as well as some of the loan portfolio New York Community Bank stock is materially ran up since the news of the acquisition of signature as deposits. So we feel very good with both our bank lenders warehouse line providers.
Thank you Jason.
Back to the operator for further for further questions via the.
The other phone phone requests.
Thank you as a reminder, star one if you would like to ask a question.
Our first question from Jeff <unk> with <unk> capital.
Hey, Jason good presentation, really hopeful and whatnot.
I was curious my first question is.
How are how is the stock repurchase plan coming.
We purchased about $1 2 million in stock repurchases that information will be in our in our 10-K filing out on Monday.
Okay fantastic.
Okay, and then given the.
Uh huh.
What kind of progress with the business and whatnot.
I did want to ask a little bit about the pipeline.
<unk> has laid out.
When youre talking about the $35 million.
Number one.
Can you give a little bit more clarity as to what that means because it sounded like you had $25 million was like.
Kind of pot committed those deals are going to close but what's the idea a little bit more clarity over 35, no absolutely. So thats a great question Geoff So when you look at $35 million, what we're saying is we have.
Borrowers who have move forward signed term sheets.
What are the appraisals that didn't process headed towards a closing so we just turned on our marketing we have $35 million committed directed borrower.
We are behind that.
Talk to another between 25 and $40 million of Quanta.
Prospects, who are interested in doing.
Acquired loans are getting rehab loans from us so.
We just recently turned on our originations and we're sitting around $50 million to $60 million of direct originations.
So that's where we're at it's just a different stage of the process. So that's what that is.
<unk> seen a 35% and 25 35 committed.
By the borrowers and a 25 were in talks with.
And then you've got another 15 in wholesales. So the quick math, yes, it would be.
No.
Yes, great question.
Go ahead, Jeff.
Well see you till you get 50% of the $25 million is in process.
Let's just call it $15 million.
So youre basically.
In all likelihood going to be getting $65 million in originations.
From kind of what's in the pipeline now without really getting more marketing going where your broker channel.
Al So the.
Frame for closing one of these loans is probably what 30% to 45 days.
So I think.
So what youre, saying is exactly we just turned on the originations what we found is.
We're working with a pipeline of between 50 and $60 million with just turning on to directed borrower originations, obviously as we smooth things out we can increase our market penetration there wholesale.
Rolled out what we call a soft rollout we literally are getting calls every day from Counterparties, who want to face us and want us to do underwriting. So right now we literally turned around with one counterparty, we have some $15 million in committed loans.
We have probably another seven to eight that were going to rollout in the next two weeks counterparties. So what we're trying to do in an organized fashion rule out the wholesale side, because frankly, we're very confident.
Between the calls we receive the request received there is a tremendous amount of demand to face us on the wholesale side.
<unk> will obviously you know.
The volume.
We're trying to manage it properly for us to go out and just go hard and turn it on we could cause some production problems. So we're trying to leg into it with that being said with one counterparty we have $50 million of submissions. We have another five to eight that we're gonna turn live on in next two weeks.
So we feel very good that over the next three months our wholesale our wholesale production is going to ramp quickly. Okay and then finally.
We've done a lot of work around the broker channel and we haven't turned it on yet and we Havent started marketing directly to brokers in our space brokers are very important part of the business.
Incidentally work with brokers, but frankly, we haven't started.
Focus our marketing towards them, which we plan on doing over the next three to four weeks and that's that's a third channel that we expect to see material volume coming in from originations. So.
If we're sitting at 50 to 60 million directed borrower 15 million from a weeks to one week being turned on any of the week.
I'd say that's from like three days.
I think you can extrapolate that the ramp.
It should be pretty strong over the next 30 or I'm sorry over the next three months with our business.
Yes, I mean, it sounds like you'll probably be able to hit your $600 million goal this year and like on a run rate just absolutely destroy that so.
Given that.
When.
When should we expect profitability for the company.
Yeah look I mean <unk>.
I provided metrics some framework for how we're looking at the cost infrastructure and the revenue side of it.
I'm as eager as anybody to turn a profit.
It was most important for us to focus on our production as you. Your first question is around our production. So I'm very focused on getting all three channels why.
I don't want to give a forward statement, but.
My interest is aligned with shareholders to getting it.
We're looking to get properly on a monthly basis as soon as possible I don't think it's going to be terribly far so.
Okay.
Okay. So given the huge amount of loans that are not only coming your way, but seem to be once you kind of turn on the.
The wholesale channel a little bit more and whatnot.
In the broker channel.
How are you going to be able to underwrite like all those loans, but it seems like a lot.
So look we were pretty staffed where staff pretty well we added.
A fair amount of staffing and over September October November over in Bangalore, We have a great team. There. So we can easily absorb.
Probably triple what we have right now we will have to add a couple of processors or more processors, but frankly, we feel good that our current team can handle upwards of 100 $150 million a month.
And that standard maybe adding one processor, but.
There's a lot of there's a lot of slack out there and talent between Bangalore and here that we get higher pretty easily so that we've already.
We've been out looking at it.
Whats out there and supply of labor and we feel very good day.
If we needed it the demands there we can add the people and the talent to process. The loans, that's not a concern of ours.
Okay and then.
What what are the operating processes and stuff like for that.
You know like where some of the differences with having a really remote workforce.
How does that kind of play into.
And just how you guys are going about operating with with the loan origination and whatnot.
So that's a great question and look we're in.
I'm going to turn it over to Diana second, but just to be clear.
I work on the Street I worked at Morgan Stanley anymore, and we had offices all around the world. We have people working all across the country as we're on the road and.
Things move through pretty seamlessly and the reason we brought Danya board She's had a tremendous history in building out these platforms as well as reviewing these platform so with that I'd love to but Don you answered that Don are you here.
I am yes, and Jeff. Thanks for the question so as Jason kind of highlighted earlier in the call. We do have a pipeline that is in various stages at this point more heavily weighted in the earlier stages. It's my job to make sure that we have the operational infrastructure that is required to facilitate that so a lot of the work that we've been focusing on in recent weeks.
Has been really development of documented guidelines, making sure that we're using standardized form is making sure that we have automated processes to the extent possible.
Some of the things that I'm, specifically, Jonathan we're trying to make it easier to process and underwrite. These bonds. So while we have tremendous capabilities that are proprietary to our nature and given the investor Takeouts and outlets that Jason has negotiated we still need to create a scalable process. We can't look at every deal like a customer deal and toward that end we.
They did a lot of tools, so think about kind of a rudimentary automated underwriting system that at this point, an excel based model at some point in the future a web based forum that not only can be used internally by loan officers to more quickly identify whether or not they have qualified deals, but also externally facing to broker partner, we're doing things like.
Creating standardized form four basic things appraisal orders title orders just to make sure that these things are being processed in a consistent fashion and that we're shaving off seconds minutes, whatever it is and internal processes. So that we can scale more. Additionally.
Additionally, I think we're trying to get ahead of things to eliminate duplicate processes for borrowers and broker partners, obviously theres a lot of touch points and alone manufacturing process with external vendors that we have to coordinate lifts we want to make sure that TD extent, we have special endorsements on our construction protects or state specific consideration that we were making those requests of local title.
Earlier in the process. So that we don't run into 11th hour issue. So in short a lot of coordination with communication protocols standardized operating procedures automated tools to the extent possible to make sure that not only can we process deals in a fashion that is in alignment with our credit risk standards, but that we can do so in an efficient manner and.
Create a scalable workflow.
Well it sounds like Youre definitely ahead of a lot of the local banks I used for for loans on properties. So.
It really.
Really good to hear thanks Tanya.
No problem Jeff.
I've got some more questions, but ill hop off and I'll circle back if theres anyone else in the queue.
Thank you we'll take our next question from Matthew Howlett with B Riley.
Thank you yeah. Thanks, good morning, everybody.
Look the capital I'm really just trying to appreciate.
The issue for the capital and knowledge of the direct selling directly.
To the to the life insurance companies or the big asset managers I guess, that's my question on.
Whats the outlook, you're signed up you said here a pretty big asset manager in the life insurance companies what are your conversations like with additional.
Add on that side, but what are you. What are you hearing what are you thinking.
We are still tied to enter.
No that's great Matt that's a great question. So that's been a focus of ours when we tested.
Our proprietary lead generation in late Q3, and Q4 last year, we realized that we could ramp pretty easily. So it became paramount to add these forward flows so with that being said.
We're currently signed up with three years, but I think a positive for takeout partners.
Three of the four partners have.
Pockets of money for life life insurance, where in addition, we're talking probably another six to eight I would say three quarters of those are life companies and another three to five money managers.
On the insurance side, they can't get enough product.
We can originate 300 million a month.
We couldnt sell the buckets. So there's massive amounts of capital they are under pressure to figure out different ways to deploy.
Their capital into above market rates getting away from the liquid agency market.
And so there's tremendous amount of capital being raised insurance companies, we see it but it's not a matter of.
Do they have enough balance sheet, they can't give out product so, but it's a long process. When you sign up a insurance company. They just on time with anybody they pick a handful of partners and they work with those people because.
They don't have the same infrastructure they need to have a credible counterparty they need somebody who has the infrastructure has the resources to deliver quality products and with us having a long history with our team in India with our management team here.
Pretty solid model for for.
These light kosta partnered with and so with that being said.
We found that the beginning of year is the white coast have a ton of capital and.
And the money managers or some of their voice and some that are sitting on the sidelines so with the money managers.
And could you just you almost touching almost 10 counterparties.
And would they have been what would the flow arrangements.
Look like I mean with <unk>.
How big would they be did I hear you say you could.
He could do 300.
The demand is just the <unk>.
Could you just give us a sense, how big each of them could be.
So Joe let me step back a second so already notwithstanding.
We had double check for sure three if not four counterparties. We're in talks with another seven to eight okay.
On the term side the SCR product, we could originate just under term product, we could originate to $300 a month and I still wouldn't be able to fill the various insurance numbers youre talking to so these insurance companies have a mandate.
And we're talking to each one of them.
I can tell you it's going to be in the tens of it's going to be like I would assume they haven't they have a mandate to deploy.
Three to 5 billion at least each and DSLR paper.
If not more and.
So with that being said about before originating 200 million a month and Thats $2 billion, we distribute that.
The three different groups that 700 million per an insurance company.
Scratching the bucket. Okay. So typically you don't have caps on how much you can sell to each insurance company, but.
An ideal role to become relevant.
Selling a monthly basis $75 million to an insurance company you become relevant to them. So for us the target is.
B cell and $75 million at a clip a month to each insurance counterparty that we're dealing with but we don't want to sell 510 months it doesn't.
We're not we won't become irrelevant to them. So we have to quickly get to 75 million a month. Because then we become very repeatable partner to these insurance companies. So that's on that's on the term side and then we look at the transitional.
Typically it's been similar if you're going to sell the insurance companies you guys sell typically $50 million to $75 million.
Slugs in order to become relevant.
They're not going to get you unless you get to that size, so and with that that's our strategies is to getting that kind of to get to that kind of level.
We are capable of getting that kind of volume numbers I think the counterparties were talking to you when we sign up with no. We can get there and that's why they signed up with us directly.
So yes.
Hopefully that helps Matt.
No it does and thanks for clarifying that.
Great to hear about what you know what.
They are seeing on the other side is just.
The fact that you can deliver them. This product just incredible model and I guess, that's my next question on the margins look like they went up on the RTL last time, you gave it to us.
Just curious what's driving that and do you think the $3 50 margin.
Long term do you look at as sustainable for you.
Look I've been around the space, a long time and.
So I've seen.
On the RTL side on the transitional loan side.
Margins why is by 600 points so.
Typically.
As the market has more involvement so when theres more securitizations in more players in the spreads actually widen out so.
Current in the current market when there is a shakeup that's going on and went on last year in the securitization market in this year's quarter on the bank sector.
In the short run it shakes out a lot of the weak players a lot of the people who don't have good capital markets don't have good takeout partners just don't have.
The infrastructure to handle a tough environment.
You know again, when we start <unk>.
To originate 50 to 75 million a month, that's ability to delivering two insurance companies.
With that being said.
We've noticed there's a lack of liquidity and when I say that too.
Borrowers just can't go to any shop now in closure loans, while these smaller to medium sized players are getting shuck it shook out.
While all of these guys are coming to us for us to fund wholesale wise.
That being said our spreads have widened spreads widened because where liquidity provider. So we know what we have is valuable and so we've been able to exercise pricing control because we are a liquidity provider and we have capital and we have a strong take up partners that have permanent capital. So our spreads have widened.
Because we're not a price taker at this point in the market. So that's why on the on the transitional loans.
Our spreads have widened and so it's more about how much production can we do and we're really focused on trying to get our production up because the fact of the matter is we know that we're in.
Very positive we have a competitive advantage.
And that side on the <unk> side same thing.
They had.
What we're seeing is there's insatiable demand by insurance companies for our <unk> product.
As a whole there is competition, but yeah theres a lot of originators.
There aren't structured property and so theyre getting washed out so on the term side, we see a lot, but a little bit more competition than we do on the RTL side, but the fact is the market shaken out people right now.
It gives us more pricing power so that.
I think what position right the market.
Mortgage turbines lately is causing us to be in a position of strength.
So that goes without saying that we're very much focused on our production. Our goal right now we have the right counterparties in place we're talking to further counterparties, you're going to be value add it's.
It is simply this point how much effort, we haven't put in to get our production to where it needs to be and we have a street channels. The channels are direct borrower.
Wholesale and then shortly broker channel.
So.
To help met.
Absolutely.
Medical margins.
And the last one I really appreciate all the color it takes watches.
Yes.
Thank you we will take our next question from Jeff Moore.
Capital.
Hum.
With rising rates and.
And a lot of the bank failures that are happening.
<unk>.
How how does that affect your model and then if lending freezes up with banks.
What do you think youll be able to do with originations and sales.
This is a better environment for you is it a worse environment kind of what are your general thoughts on that.
Yeah.
Great question similar to what I mentioned the mat.
When banks like right now, we're going into a tough environment for banks.
They have a tendency to lend less so youll see their lending pulls back and so with that being said that that's a positive for us.
The more that the peripheral banks pull back.
Street firms are involved with this space just because they don't quite understand it so the fact that matters.
Competition. It gives us more pricing power. This is a natural product the insurance companies love the product and insurance companies can't get enough of it and.
And frankly, I've had plenty of conversations assurance must know they're in the driver's seat right now they know it and so.
So.
No.
To your to answer your question is in this environment. It's long term, it's very beneficial for us this puts us weeds out some of the weaker players. It allows us to take more market share. It gives us more pricing power and that allows us to build out our processes. So it's a win win for us.
On the street the one thing you learn one.
One thing I've learned over my 15 years in working on the street as volatility creates opportunity.
At the end of the day there.
There are people who are heading for the sidelines, but.
Being very experienced this is a market that creates opportunity. It's a very important for us to capitalize on the volatility.
Again, it's a great opportunity for us our product is a natural hedge it's again, it's a it's a high yield product short duration that resets often.
The underlying collateral is always improving over the life of loan.
It has a lot of enhancements to it so it's a natural hedge that would you what would you rather have rather have it.
Mortgage bond at $3 50 basis points or would you rather heavy a loan book at 11% that has 30 points of equity debt when youre done with it it has 40 or 45 points of equity it's a no brainer.
Mhm mhm.
Okay.
Okay.
How much line of credit availability would you need to have to do say.
Two or $300 million a month in originations are.
You can kind of the numbers.
We can kind of pencil in that you are probably going to be doing at some point.
Well look we have 100 million right now.
Frankly, you should be able to reach about <unk> those lines three to four times a month.
Being pressured.
Our current warehouse line capacity.
More than enough handle $2 million to $300 million in production as I mentioned earlier.
Lenders, who come to us asking us if we want more more balance sheet more warehouse lines, they like the product they like the yield.
And they like the profile of the assets. So they are perhaps increasing our facilities.
The goal right now.
Is the focus on production, but we have enough warehouse line to hit the numbers that you are that you are indicating and we have enough.
People in the back office.
Primarily to get to those numbers as well.
Okay.
<unk>.
I just want to.
My last question is.
How how are the.
Are there any updates on the luxor or the red leaf lawsuits.
Yes.
There's going to be in our 10-K, which will be filed.
Filed on Monday, So there is it's.
Yes, there'll be there theres not theres no real theres no real material updates with that information will be in the 10-K that will be out on Monday.
Okay cool. Thank you very much Jason great stuff and looking for the.
The next call.
Sounds good thanks, guys.
Thank you.
With no additional questions in queue I'd like to turn the call back over to Mr. <unk> for any additional or closing remarks.
So again, thanks, Katie for for the intro finally, I want to say I am excited to be.
The teams are excited by our team's accomplishments. This year does that joined last July we've I think we've gotten a lot done we're in a great position to do great things going forward. So I look forward to ramping up our performance throughout the year.
Thank you.
That will conclude today's call. We appreciate your participation.
Yeah.
Yes.
Yes.
Yeah.