Altisource Asset Management Corporation
Q2 2014 Earnings Call Transcript

Published: 22 Jul 2014

[Operator:]

Good day, ladies and gentlemen and welcome to the Altisource Asset Management Corporation Second Quarter 2014 Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). I would like to introduce your host for this conference call Kenneth Najour, Chief Financial Officer, you may begin, sir.

[Kenneth Najour:]

Thank you. Good morning everyone and thank you for joining us today. My name is Ken Najour and I'm the Chief Financial Officer of Altisource Asset Management Corporation which we refer to as AAMC. Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slide please log on to our website at www.altisourceamc.com. These slides provide additional information investors may find useful. As indicated on slide one our presentation may contain certain forward-looking statements pursuant to the Safe Harbor provision of the federal securities laws. These forward-looking statements may be identified by a reference to the future period or by use of forward-looking terminology. And may involve risks and uncertainties that could cause the company's actual 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 our year end December 31, 2013 Form 10-K, our first quarter 2014 Form 10-Q and the second quarter 2014 Form 10-Q we will file today. If you would like to receive news releases, SEC filings and other materials via email, please register on the shareholders page of our website using the E-Mail Alerts button. As indicated on slide two, joining me for today's presentation are Bill Erbey Chairman of AAMC and Ashish Pandey Chief Executive Officer of AAMC. I would now like to turn the call over to Bill Erbery. Bill?

[Bill Erbey:]

Thank you Ken. Good morning everyone and thank you for joining us today. It's a pleasure to share with you AAMC's second quarter results. AAMC provides asset management services to Altisource Residential Corporation which we refer to as Resi and to NewSource. As shown on slide three, during the second quarter Resi, paid a cash dividend of $0.45 per share or $25.7 million. This represents the third consecutive increase in quarterly dividend since Resi paid its first dividend in the third quarter of 2013. The second quarter of 2014 dividend represents an annualized return on equity of 8% after accounting for the incentive fees paid to AAMC. We continue to successfully execute Resi's business plans and grow its businesses demonstrated by our second quarter results. When we started Resi a year and half ago, we outlined three key factors necessary to build, successfully build one of the largest single family rental businesses. Simply put Resi’s needs to acquire single family properties at attractive returns and its properties in its rental portfolio providing cost effective quality service and raise equity capital at accretive pricing. During the second quarter of 2014, we successfully delivered on the first two factors. Resi's second quarter investment activities did not require Resi to raise additional equity capital. As shown on slide four, during the second quarter, Resi agreed to acquire a very large portfolio of mortgage loans at attractive pricing. Resi agreed to acquire approximately 4,400 non-performing and re-performing mortgage loans with $1.23 billion of underlying property value at a price equal to 59% for the underlying property value. As to Resi's operating performance, Resi saw 41% increase in loan resolutions over first quarter of 2014. Resi also exceeded our previous guidance of 100 rental properties at the end of the second quarter. At the end of the quarter, Resi had142 rental properties of which 102 released and 40 were listed for rent. It has taken an average of 27 days after listing for Resi’s homes to rent. And Resi continues to work diligently on our second target of 1,000 rental properties by the end of 2014. Ashish will provide more detail on resolutions and leasing efforts during the quarter. Resi funded its second quarter acquisitions with additional borrowing under its repurchase facilities. As of the end of the first quarter, we were significantly under levered at 37% and had a substantial amount of unencumbered capital which Resi used to fund second quarter acquisitions. I’d now like to spend a few minutes recounting the growth of Resi’s repurchase facilities. As you can see on a slide five in a brief span of 15 months, we’ve increased the financing available on Resi’s repurchase facilities from $100 million to over $1.6 billion. We’ve executed at least one upsize with each of Resi’s existing lenders and lenders are becoming increasingly comfortable in financing NPLs for Resi. Securitization financing for NPLs for the third quarter will mark another milestone for Resi in its efforts to broaden its access to that market. On a related note, there is growing confidence in single-family rentals as a stable asset class. In the second quarter alone, nearly $2.5 billion of debt was raised in four single-family rental securitization transactions by three different market participants. It’s important to note that securitization offers higher effective leverage and continued development in growth of the single-family rental securitization market is very positive for the industry and for Resi. We believe that it’s important for investors to understand the sensitivity of NPL pricing to certain key factors. On slide six, we show the impact of three key variables on NPL pricing. The first variable is rental conversion rate. Our estimated 50% conversion rate provides Resi with a 4% advantage against the competitor that does not have a rental strategy and therefore incurs the brokerage and closing costs associated with REO liquidation. The second variable is the loan modification rate. RESI service at Oakland has been ranked best in class in modifying loans by many third-party servicing performance reports, modifications are most desired outcome as they lead to a win-win situation for RESI's borrowers and our shareholders. A 10% increase in the modification rates would result in 2.5 point increase in the price that RESI can pay for NPLs and meet our targeted returns. The third variable is the foreclosure timeline, a reduction for closure timelines by three months would result in a two point increase in the price that RESI can pay for NPLs and meet our targeted returns. Often is recognized as an industry leader in managing foreclosure timelines. In summary, on pulls that need our investment criteria, these factors provide Resi with a significant advantage over market players. We continue to see the NPL acquisition strategy is an effective and sustainable source of rental properties for Resi. Our market participants were these sourcing strategy, but none are doing so on an exclusive basis. Additionally unlike Resi other market participants do not have access to nationwide property management capability and skill benefits offered by our strategic relationship with Altisource portfolio solution. This capability gives Resi a much larger pool of potential rental properties to choose from in order to achieve higher returns. In addition, Resi's contract without Altisource affords it the benefit of scale and give MSA with a very first property at acquires in fresh MSA. We believe there are abilities to leverage the significant scale advantage results in lower operating costs and drives higher yields on Resi's rental properties before factoring in any yield benefit from this lower acquisition phases. Before I turn the call over to Ashish, I would like to provide an update on the progress we have made towards developing AAMC’s second managed vehicle. As you know, our NewSource subsidiary currently focuses on title reinsurance. As part of our plan to launch additional managed vehicles, we are in advanced stages of the structuring NewSource as a separate company with a broader focus on mortgage and housing related insurance and reinsurance products. As shown on slide seven, this is a very large market that we believe offers attractive opportunities for NewSource. Within this opportunity set, we plan to target products with low catastrophic risk and high operational intensity. As highlighted on slide eight, such products include title insurance, home warranty and residential property insurance which offers favorable and attractive economics. Our strategic plan is intended to provide NewSource with increased access to risk capital required to take advantage of this target opportunity and to allow AAMC to continue to be a capital life provider of Asset management services. Building NewSource into a large player in the reinsurance market will take time and effort, but we believe we can attract the resources required to make this a meaningful business for NewSource and for AAMC in the long run. We are very excited about the prospects for NewSource and we’ll continue to dedicate the resources required to finalize and implement this plan in the coming months. Ashish will now provide more detail on RESI’s operations and investment activities during the quarter and then Ken will provide details on AAMC’s financial performance. I will now turn the call over to Ashish. Ashish?

[Ashish Pandey:]

Thank you, Bill. I am happy to say that we see solid operating performance has continued from prior quarters and Resi's second quarter resolution performance exceeded the first quarter by 41%. As shown on slide nine, during the quarter Resi successfully resolved 1,156 loans with $242 million in unpaid principle balance. Slide 10 provides details of loan resolution. Resi had a steady flow of REO conversions providing it with a sizable REO inventory to convert into rental properties. 907 loans were converted to REO, either to foreclosure or deeds-in-lieu. With this, the total number of REOs at the end of the second quarter more than doubled to 1,958 properties, compared to 896 properties at the end of the first quarter. 90 loans were resolved via short sale and third-party sales, if 98% of the updated BPO values at the time of resolution, generating net proceeds of approximately 28.2 million. Additional 90 loans were modified and rendered current, 30 loans were reinstated i.e. the borrower made all delinquent payments. Resi's average unlevered current yield on the modified and reinstated loans based on the purchase price is 9.7%. 20 loans were refinanced by the borrower at 108% of the most recent BPO value available at the time of resolution and 119% of the BPO value at the time of acquisition, generating approximately $3.1 million in net proceeds. And 19 loans were repaid in full by the respective borrowers generating approximately $8.5 million in net proceeds. Of the loans liquidated during the quarter, Resi realized an aggregate gain of 37% over the purchase price paid for these loans. As Bill mentioned earlier, Resi exceeded our initial target of having at least 100 rental properties by the end of the second quarter. As shown on slide 11, at the end of second quarter, 102 properties in Resi's portfolio were leased. Average growth spent per property was 12% of the property value at the time of acquisition. On average, these properties were leased within 27 days of being placed under market. 40 additional properties were renovated and listed for rent. 142 properties the renovation was completed, Resi's average renovation expense per property was $16,400 and renovations were in progress on 140 additional properties. We are pleased with the seamless way in which Altisource Portfolio Solutions has been able to support Resi's leasing growth. While not a statically significant number Resi has had two leases up for renewal since inception and both tenants opted to extend their leases for an additional year. Furthermore approximately 30% of Resi's leases have two year terms. We realized that we are still in the initial stages of building Resi's rental portfolio. Yet we find these early signs very encouraging. We're excited about the prospects of lower than assumed turnover costs and the resultant impact on Resi's net rental lead. Each additional year the tenant stays beyond initial assumptions could impact net rental yield by as much as 130 basis points. Please turn to slide 12 for an update on Resi's second quarter NPL acquisition activity. In June 2014, RESI agreed to acquire two pools from a third party in a privately negotiated transaction, one of them being NPL pool and the other performing loan pool. The NPL pool consists of 3,200 mortgaged loans with 760 million in UPB and 892 million in market value of underlying properties. The RPA pool consist of 1,100 mortgaged loans with 253 million in UPB and 328 million in market value of underlying properties and came as a package deal with the larger NPL pool. The first portion of this transaction was completed in the last week of June. I am very excited about this NPL acquisition which maybe one of the Resi’s most attractive acquisitions to-date. For the non-performing loans purchased in the quarter, Resi paid 63% of the BPO value which we believe is a very attractive price in the context of pool characteristics. More than 60% of the loans had Loan To Value ratios or LTVs less than or equal to 100%, with 45% of the loans having LTVs less than or equal to 80%. Modification of a loan is our most preferred outcome. Given this LTV profile, we expect to have a higher modification percentage on this pool. A borrower with positive equity in a home is much more likely to explore a loan restructuring or a short fail. In addition this portfolio of loans has a favorable geographic distribution, the top two space by UPB were California and Florida accounting for 36% of the overall portfolio. Resi paid 70% of UPV or 53% of BPO value for the RPLs purchased in the quarter. Weighted average LTV on the RPLs was 92% that approximately 50% of the loans having LTVs less than or equal to 80%. RESI’s expected return on the RPL pool is in the high single-digits. We anticipate the RPL pool to improving great quality and loan to value over time, resulting in high quality FX that are potentially eligible for refinancing. Refinancing driven by debt consolidation on the part of borrowers could generate upside returns for RESI shareholders. RESI may acquire a small amount of RPLs in the future but will do so only to facilitate its larger NPL purchases. We expect RESI to complete the remaining portion of this acquisition consisting of approximately 2,100 non-performing loans and 200 performing loans with 478 million in UPB and 573 million in market value of underlying properties by the end of July. In May 2014, Resi completed the first closing of the previously announced 915 asset transactions with the per shares of 474 NPLs and 190 REOs with 127 million in market value of properties. We anticipate Resi to close the remainder of the transaction in the third quarter. In aggregate Resi agrees to pay 65% of the total market value of underlying properties for all of the NPLs and REOs that Resi acquired in the second quarter. This compares very favorably to the price of state by competitors in other publicly announced NPL acquisitions during the second quarter. Specially in-light of the favorable geographical distributions and LTV characteristics of the pools. We continue to see a large supply of NPL pools available in the market for sale which should allow us to grow Resi’s portfolio further. I would now like to turn the call over to Ken. Ken?

[Kenneth Najour:]

Thank you, Ashish. Today, I'll provide more detail on our financial performance for the second quarter of 2014. As you can see on slide 13, we reported net income of $13.2 million or $4.50 per share for the quarter, which compares favorably to $6.8 million or $2.39 per share for the first quarter of 2014. As we have stated in previous earnings releases. Under GAAP, we are required to consolidate Resi into our financial statements as if we were apparent in a typical apparent subsidiary relationship. But in reality, we do not have a claim on either 100% of the income or assets of Resi. Also because we own 100% of the (inaudible) common stock on new resource and there are no systemic [kick out] rights to other equity owners we consolidate NewSource in our consolidated financial statements. In order to provide clarity to our shareholders we have included certain non-GAAP disclosures on slides 13 and 14 that provides standalone financials for AAMC. We believe this non-GAAP presentation provides a meaningful comparison between our reported results and how we internally managed our business. This non-GAAP information should be viewed in addition not as an alternative for our reported results under GAAP. On slide 13 show the revenues of AAMC which consist of incentive management fees of $13.7 million and expense reimbursements of $2 million. We also show operating expense of $2.4 million which represents the cost of operating AAMC on a standalone basis. Our operating cost can be broken down into two components. First we incurred $862,000 of compensation and benefit expense and second we incurred professional services and other expenses of $1.5 million. AAMC’s standalone net income was therefore $13.1 million in the second quarter. We believe that the standalone revenue and cost figures provide the true measure of AAMC’s operating results. Additionally AAMC’s balance sheet under GAAP includes the equity of residential which is then reflected in AAMC’s book value per share. This reporting does not reflect the true economic of AAMC shareholders. On slide 14 we show the standalone balance sheet of residential, NewSource and AAMC. At this time we would like to open the call up for questions. Operator?

[Operator:]

(Operator Instructions). Our first question comes from Mike Grondahl with Piper Jaffray.

[Mike Grondahl:]

Yes, thanks guys. What is -- if you have an estimate of the NAV for the Resi portfolio as of the end of July, when you complete those acquisitions?

[Ashish Pandey:]

Mike, it would be close to $33 per share.

[Mike Grondahl:]

Okay. That was the [980] that’s been mentioned. Okay. And then you guys have commented that the pipeline if you will or the activity is accelerating into year-end, if you could just talk a little bit about the sources of that activity. And then I guess I'm a little curious about competition too, do you expect that to accelerate the year-end or what do you kind of see on the competitive environment?

[Ashish Pandey:]

Mike today we are seeing more opportunities in near-term as compared to when we spoke on the first quarter earnings call. We think that competitive environment has stabilized, we have seen certain pricing points after HUD first auction which support our view; we have seen deals trading in high 60s to low 70s of property value. So, we feel good going into the third quarter. I will not like to get into details of individual sellers; it's not in best interest of our shareholders.

[Mike Grondahl:]

No, but is it still the large banks? I mean I don't want individual names, but is it still primarily the bank channel?

[Ashish Pandey:]

Yes. And you will -- it's primarily the bank channel with some inputs from…

[Mike Grondahl:]

Okay. And then your post securities securitization in 3Q, is your leverage outlook, maybe just update us on that; is it 60% debt, 65% debt; what are you thinking about now kind of as we look forward a little bit?

[Ashish Pandey:]

It should be 60% debt, 40% equity.

[Mike Grondahl:]

Any thoughts on taking that slightly higher?

[Ashish Pandey:]

We can always explore that but I think there is another option which is trying to go and raise some equity capital. That can only support you till some level of UPB purchase; after that, we will need to have equity capital on hand.

[Mike Grondahl:]

Okay. And then maybe just lastly; of the rentals you list on altisourcerentalhomes.com, what percent of those end up getting sold maybe instead of rented?

[Ashish Pandey:]

That number would be in low single-digits, probably 2% or 3%.

[Mike Grondahl:]

Low single-digits, 2% or 3%. Okay, that’s pretty small. Okay, thank you.

[Ashish Pandey:]

You are welcome.

[Operator:]

(Operator Instructions). I am not showing any -- actually I do, I apologize there is one person in the queue. Our next question comes from Fred Small with Compass Point.

[Fred Small:]

Hey, just really quickly, when I look at the BPO or the asset value per loan on the NPLs that the NPL part of deal you announced at sort of 280, almost 280 on average, what sort of -- I guess what sort of resolution, what percentage of the resolutions would you expect there to wind up being rentals just given -- that’s higher than the overall portfolio?

[Ashish Pandey:]

Fred, we expect that number to be 50%. There is a little bit of barbelling; there are a couple of properties which are high valued property in that portfolio. And I think we’ve bought them at interesting price, so there should be good pick up. But on an average, we expect rental conversion to be 50% on this pool.

[Fred Small:]

Okay, got it. So it won’t really change that and still sort of -- you’re still looking at I mean somewhere between 100 to 120 and 160 overall. I think it’s where properties have converted?

[Ashish Pandey:]

That’s correct, Fred.

[Operator:]

This does conclude the question-and-answer portion of the conference. I’d like to turn the conference back over to the company for closing remarks.

[Ashish Pandey:]

Thank you for joining the call. Have a great day.

[Operator:]

You may all disconnect and have a wonderful day.