Altisource Portfolio Solutions (NASDAQ:ASPS) Q2 2021 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the Altisource Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Michelle Esterman, Chief Financial Officer. Thank you. Please go ahead.

0:37 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.althysource.com. These provide additional information investors may find useful. Our remarks 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 Altisource. 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 second quarter 2021 10-Q which describe factors that may lead to different results. We undertake no obligation to update these statements, financial scenarios, and projections previously provided or provided here as a result of a 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.

1:52 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 Shepro, our Chairman and Chief Executive Officer. I will now turn the call over to Bill.

2:06 Thanks, Michelle. Good morning, and thank you for joining today's call. This morning, I will discuss the progress we are making in our core origination and default businesses and provide an update on our investment and point list. While the last year and a half presented a challenging operating environment for AltaSource, I am very excited about the future for our origination and default businesses. Beginning with our origination business in slide 3, I'm pleased with the second quarter performance and more importantly with our long-term prospects. This business generated $14.5 million in revenue in the second quarter, representing 16% growth compared to the same period in 2020, outpacing the estimated 13% growth in the overall origination market.

2:51 More importantly, we believe our attractive origination business model should support rapid growth. Slides four through six highlight our business model and growth opportunities. Beginning with slide four, Altasource is the manager of the 241-member LendersOne Mortgage Cooperative. As the manager, we offer a suite of solutions designed to help the members improve their profitability and compete against larger and better capitalized mortgage companies. We also provide the members with data and market intelligence to drive better business decisions and improve profitability. We estimate that the LendersOne members collectively originated approximately 15% of residential mortgages in 2020. This is roughly the same volume of the top three lenders combined.

3:40 We believe the LendersOne members are also well positioned to gain market share in a rising interest rate environment as their typical branch office model is more purchase as opposed to refi oriented. As an example of the value we bring to the LendersOne members, in the second quarter, one of the nation's largest retailers selected LendersOne over other mortgage lenders to establish store and store branch locations as part of a pilot program. If the program is successful, we anticipate the national rollout will drive attractive mortgage leads to the LendersOne members, enhance customer loyalty for the retailer, and generate attractive revenue and earnings for AltaSource. Slide 5 illustrates the LendersOne business model.

4:25 As the manager of the LendersOne cooperative, our objective is to leverage the collective buying power of the members to improve their profitability and generate revenue for AltaSource primarily through four revenue streams. First, we negotiate better pricing for the members with preferred capital market providers and vendors and participate in enhanced capital market execution and vendor savings. Second, we resell certain products, including flood certifications, e-closings, and verifications, at attractive pricing to the members, generating margins for us as the manager. Third, we establish programs where we potentially earn performance-based equity in certain providers that offer products to the members at attractive pricing. Finally, we are a direct provider of solutions including title insurance and escrow, valuation, loan fulfillment, and vendor oversight technology.

5:17 Slide 6 sets forth a growth strategy for our origination business. We believe there is a compounding growth opportunity by adding more LendersOne members, launching new solutions, increasing the capture rate of existing solutions, and evolving to a higher margin reseller or direct provider for certain solutions. The growth opportunity is fueled by the network effect of the LendersOne Cooperative, where more members provide greater buying power and support new product launches. Greater buying power in new products improve member profitability, and stronger member profitability increases product adoption and attracts more members. As part of our growth strategy, this quarter we are launching a beta version of our LendersOne loan automation technology, which we refer to as Lola.

6:05 Lola is an internally developed technology solution designed to make it easier for LendersOne members to order and receive our solutions through a single point of entry and automate loan manufacturing processes to improve members' operational efficiency. We're excited about the opportunity for our origination business and believe we are just getting started. With our origination business's unique distribution engine, mission-critical solutions, and strong growth prospects, We believe this business will be a significant catalyst to create value for shareholders. Notably, there are several companies that we believe have similar business models which recently executed capital market transactions at attractive valuations. On slide seven, we include a comparison of three of these companies to our origination business. As you can see, technology-enabled, solutions-based companies with a strong network effect and growth are valued very highly by the market.

7:04 With the attractive market comps and the progress we are making with the origination business, we are evaluating ways to enhance shareholder value. 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, and we don't intend to provide updates unless and until we determine that further disclosure is appropriate or required. Turning to slide eight in our default business. The default market in our business have been severely impacted by the pandemic. However, we recently gained additional clarity on the timing of the recovery of the default market.

7:50 The federal government extended its foreclosure and eviction moratoriums by one month through July 2021 and indicated that this will be the last extension. The CFPB also finalized its rules on temporary loss mitigation measures, which essentially prohibits foreclosure initiations until January 1, 2022, other than a few exceptions, including those loans that were 120 days or more delinquent prior to the pandemic. Based on this clarity, we believe this business will grow in 2022 and stabilize during 2023. As shown on slide 9, We estimate that our default business revenue could grow on a stabilized basis to between $230 and $352 million.

8:38 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 second quarter 2021 levels. Turning to slide 10, we are pleased that we recently signed an agreement with Aquin, which extended the terms of certain of our services agreements from August 2025 to August 2030 and expanded the scope of solutions to include, among others, the opportunity for us to provide first and second chance foreclosure auctions on FHA loans and field services on Aquin's government loans. During the quarter, Aquin transitioned more than 1,900 of its FHA first chance foreclosure auction inventory to us and increased our percentage of field service referrals on its government loans.

9:29 We believe this agreement, along with Auckland's anticipated servicing portfolio growth, provide AlphaSource with a significant opportunity to grow. Leveraging the capabilities we have in the default business, we are re-energizing our solutions for the single-family rental market. This is an attractive business that complements our counter-cyclical default business. As you can see on slide 11, the single-family investor market is more than seven times larger than the REO sale market with an estimated 1 million investment homes sold per year compared to 140,000 foreclosures that became REO in 2019. We have experience in this market having provided these services to front yard residential for many years. While large investors have entered the space in the last decade, mom and pop investors still make up the lion's share of this market.

10:23 To meet the needs of small and midsize real estate investors, We developed a signature buyer and a signature seller program that provide a full suite of solutions to support the acquisition, management, and sale of homes. We are encouraged by the early progress of these programs. Turning to Point-A-List, Point-A-List is an AI-driven customer journey management SaaS platform that connects the dots between customer experience and business outcomes, helping companies to improve retention and reduce costs. In 2019, Altasource created Pointless as a separate legal entity and contributed the Pointless business to it. Pointless has been making great progress. During 2021, Pointless won several large contracts with household names and has increased its annual recurring revenue by more than three times since the end of 2020.

11:18 As Pointless continues to grow, it plans to look to raise third-party growth capital at what we believe could be an attractive valuation. They should also provide greater visibility into the value of our investment in PointList. We believe we are positioning Altasource as a more diversified company that should return to growth in 2022. While the last year and a half has been difficult, we're excited about our prospects in our origination and default businesses. I'll now open up the call for questions. Operator? At this time, if you'd like to ask a question, You will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster.

12:16 Your first question comes from the line of Mike Grundahl with Northland Securities.

12:24 Hey, Bill and Michelle. Hope all is well. Hey, Bill, when you were saying some high-level comments about LendersOne, were you then saying that you're looking at all options for LendersOne? I couldn't quite tell. My head was a little bit stuck on Pointalist at that point. But were those comments in reference to LendersOne or Pointalist?

12:51 So we made comments. So first of all, good morning, Mike. Nice to talk to you. We made comments both about LendersOne and Pointless. So with respect to LendersOne, we're talking about our whole origination business where we believe we can create significant shareholder value given the progress we're making and the opportunities we have in front of us. And when we look at the market and compare ourselves to some of the other firms that have recently executed capital market transactions, We believe that, you know, it makes sense for us to explore ways to improve shareholder value for us. And so we listed a variety of options in my prepared remarks that we're considering or evaluating.

13:34 Got it. And that pertains to the origination business. Is that the right way to think about it?

13:42 That's correct.

13:43 Okay.

13:45 Great. Mike, on pointillist... Pointless is also making really good progress. Its revenue has grown three times from the end of the year. We're not disclosing the actual revenue amount for competitive reasons, but it's making very significant progress. And it, too, at some point, plans to look to raise growth capital to continue and to help accelerate Pointless growth.

14:12 Got it. Do you think that's 2021 or is it more likely 2022? How do you handicap that?

14:22 So I would say, Mike, with respect to the origination business, we're working with the board to explore ways we can increase shareholder value. It's hard to, you know, anytime you go through this analysis and process, it's very difficult to handicap when it's going to happen. But we'd like to think we'd have more clarity by the end of this year, certainly. Got it. Yeah, pointless. It's still to be determined. We're making really good progress, and it'd be hard for me to tell whether something will happen this year or sometime next year, but I think it's within the next six to 12 months. Got it. Okay.

15:04 And then just on the default business, once The CFPB's kind of moratorium is listed at year-end. How long does it take to kind of see that ramp up?

15:19 So, Mike, I think in-process foreclosures – or sorry, let me take a step back. Servicers will be able to start new foreclosures for any loan that's 120 days delinquent beginning on January 1st of 2022. Okay. That's when servicers will be able to start with any loans that are 120 days or more delinquent as of that date. Separately, there's an exception to the CFPB's rules. So when the moratoriums end in August, servicers will also be able to start foreclosures this August on loans that were more than 120 days delinquent prior to March of 2020 when the pandemic began. So incrementally, we'll start to see a ramp up in August, September, October.

16:12 And it's really, look, we've never been through a pandemic like this before. So it's unclear how servicers will ramp up foreclosures based on the pre-pandemic delinquencies. And the same applies, though, in January. Servicers will begin to ramp up their foreclosures for loans that are delinquent at that point in time. Got it. We're working on the assumption. Sorry.

16:38 I was just going to say, last question, any rough guess what percent of delinquencies will qualify for the August start? Is that 10, 20 percent of foreclosures? How big of a pool is that?

17:01 Mike, don't hold me to this, but when I look at the Industry Statistics. I think there's a couple hundred, maybe two to four or five hundred thousand industry-wide foreclosures that may fall into that category. But I'm going from memory here. But I think that's the ballpark number.

17:22 Got it. Okay. Hey, thanks a lot.

17:25 Thanks, Mike. Again, if you wish to ask a question, please press star, then the number one. Your next question comes from the line of Raj Sharma with B. Riley.

17:40 Hi. Good morning, Bill and Michelle. My question, Bill, to you was just to follow on to the last speaker. On the lenders one, so you're saying there are possibilities it could be an external investment. Are you thinking it could be a spinoff or it could be A joint venture, you are not contemplating selling the business entirely. You're contemplating a joint venture or an investment by a third party.

18:21 So what we said, we said it could include a potential divesture, joint venture, third party investment in, or other strategic transaction, as well as retaining and investing in the business. So it could be. So we're looking to basically increase shareholder value, Raj. And when we take a look at some of these other companies, and we included their names on one of our slides. Michelle, do you remember what slide number that was?

18:47 Yeah, it's slide seven.

18:48 Seven, I think. Yeah, it's slide seven. You know, there's a company called Farmers Business Network. It essentially does exactly what we do with the LendersOne members for members of the farming community. Basically helps farmers... sell their crop for more money and reduce the cost to produce crops. Well, we do the same thing for the mortgage industry. We have a platform to help mortgage lenders sell their loans for more money and reduce the cost to manufacture a loan. That company was valued a year or two ago. I think it was $1.7 or $1.8 billion. It's unclear how much revenue. There's some press releases out there that looks like it was less than $200 million of revenue. at the time they raised capital.

19:33 And so when you look at those types of comps out there for businesses that are very similar, different industry, but very similar to what we're doing, leveraging technology, a great distribution network, and a suite of solutions to support that distribution network, those companies are very highly valued. And so we want to explore ways to increase shareholder value, which could take any of those forms that I just described.

20:00 Right, okay, so thank you for that. And then your comment that your default business could grow to $230 million to $52 million, I think it's one of the slides. Is that just the field services business you're talking about? You're not including the marketplace or the professional services in that number? It includes all of them. Go ahead, Michelle, please.

20:25 It includes all of the default, which would include HUBZoo, Marketplace, Field Services, Title, Valuation.

20:32 But not the professional services. That's just Field Services plus Marketplace.

20:39 Roger, it would include Field Services, Marketplace, Foreclosure, Trustee, our default valuation and default title. But just to be clear, that number is based on sort of our customer base today, including Aquin and and NRZ on the marketplace side and our other customers. That number does not make an assumption around new sales. That's basically, and Michelle, correct me if I'm wrong, but my recollection is the way we established that was based on our existing customer base. If we went back to pre-pandemic delinquency levels or where delinquency levels were, we established the goalposts between pre-pandemic delinquency levels and where delinquency levels were in the second quarter of this year.

21:25 That's right.

21:28 Got it.

21:29 Got it. And so there's an opportunity to grow from there with new customers.

21:35 Right. On the foreclosures and what CFPB allows you to do starting today, so pre-pandemic, you're saying that the number of pre-pandemic greater than 120 days are around 200,000 to 400,000. Roughly. That's my recollection. Right. So how does that compare to your current volume that you're processing?

22:03 Well, that's industry-wide, not just our customers. That's industry-wide. So it's very hard to predict, Raj, just because we don't know how servicers are going to restart either pending foreclosures or start new foreclosures for those pre-pandemic delinquent loans. So it's to be seen. We certainly expect that there will be an uptick or anticipate there'll be an uptick starting this quarter, but it's hard to tell. And then, of course, it takes time to work through the system. If it's a new foreclosure, if it's a pending foreclosure, depending on where it was in the process when the foreclosure was put on moratorium, that will determine when those loans go to foreclosure sale and ultimately REO. Okay.

22:50 Got it. And then I think one other question on Auckland, your 1,900 or so loans, how do we think of the approximate sort of revenue you get on those loans that you're going to service?

23:06 Sure. So a certain percentage of those loans, so those are first chance foreclosure auctions on an FHA portfolio. Okay. and so a certain percentage of those loans will reinstate before they get to foreclosure sale and then what remains typically you see more than 50% sell at the first chance auction and then typically 50% or more of what remains sell at the second chance auction and what we're seeing now I think we had the referrals delivered to us a few weeks ago. I think we probably already had five or ten have actually gone to foreclosure auction so far, probably generating just under $50,000 of revenue.

23:54 But you typically earn anywhere from, I think it's 3% if it's a marketing-only state, is the typical auction fee allowed. And if it's an REO, if it's a state where we cry the auction, you can earn 5% of the proceeds, up to 5%. Right, 3% to 5%.

24:14 Okay. Thank you. I'll take my questions offline.

24:18 Great. Thanks, Raj. I show no further questions at this time. I would now like to turn the call, the conference back to Bill.

24:36 Great. Thanks, operator. Thanks for joining the call. We appreciate your continued interest in Altasource.

24:42 Thank you. Thank you for participating You may disconnect at this time