Altisource Asset Management Corporation
Q3 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Good day, ladies and gentlemen and welcome to the Altisource Asset Management Third 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 now like to introduce your host for today’s conference call Mr. Robin Lowe, Chief Financial Officer. You may begin.

[Robin N Lowe:]

Thank you, Kevin. Good morning everyone and thank you for joining us today. My name is Robin Lowe 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 1, 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 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 fact 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 and second quarter 2014 Form 10-Qs and the third quarter 2014 10-Q we will file today. If you would like to receive our 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 2, 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?

[William C. Erbey:]

Thank you, Robin. Good morning everyone and thank you for joining us today. I’m pleased to share with you AAMC’s third quarter results. AAMC provides asset management services to Altisource Residential Corporation which we refer to as Resi and to NewSource Reinsurance Company Limited which we refer to as NewSource. During the third quarter, Resi increased its quarterly dividend for the fourth time in the past 12-months raising it by 22% compared to last quarter. As shown on Slide 3, during the third quarter, Resi had estimated taxable income of $38.7 million compared to cash dividend of $0.55 per share distributing $31.4 million to its shareholders. The third quarter 2014 dividend represents an annualized return on book equity of 9.6% after accounting for the incentive paid to AAMC. Also at the end of the third quarter, excluding modified loans Resi's portfolio of non-performing mortgage loans which we call NPLs consisted of 11,600 unresolved NPLs with $2.8 billion in market value of underlying properties. Resi's tax phases on these loans at the end of the third quarter was $1.9 billion. We will seek to resolve a substantial portion of these loans over the next six quarters to eight quarters and generate taxable gains. If achieved these taxable gains would drive dividend distributions to Resi's shareholders. We continue to focus on the three factors that we believe are essential for the success of Resi's business model. First, on the NPL acquisitions front, during the third quarter we acquired 1289 NPLs with $321 million in market value of underlying properties. This includes the final closing of the NPL portfolio which Resi agreed to acquire in the second quarter. We paid 57% of the market value of the underlying properties for these NPLs. During the third quarter another round of HUD auctions was held. 10 pools consisting of approximately 14,000 loans traded in an aggregate price of 70.44% or the $2 billion of market value of the underlying properties. Resi's bid on two of these pools including the largest pool in the offering was within 50 basis points of the winning bid based on the pricing of these pools, we believe the market pricing for NPLs is again trending toward more rational levels. Second, on the operations front, Resi's third quarter resolutions of NPLs increased by 31% over the second quarter. Resi's 2984 REOs at quarter end represented 20% of its overall portfolio of 15,074 NPLs in REOs. Resi's rental portfolio was comprised of 306 properties of which 216 properties were leased and 90 properties were being marketed for lease. In addition, 270 of Resi's properties were undergoing renovation at the end of the third quarter. And Ashish will provide additional details on operations later. Third, on the capital markets front we initiated efforts to increase the funding efficiency for Resi's NPL portfolio and at the same time migrate to a more stable source of financing. I’m pleased to say that Resi achieved another milestone in this initiative. As shown on Slide 4, we completed the sale of senior notes from Resi's first NPLs securitization transaction. A gross proceeds from the securitization totaled $150 million which represents approximately 73% of the price Resi paid for the NPLs or 48% of the market value of the underlying properties. The senior notes in the securitization carry a fixed interest rate of approximately 3.5%. We've planned to gradually transition from the purchase agreement based NPL financing to securitization based NPL financing and we believe securitization financing would enable Resi to achieve a more stable leverage and offers greater flexibility in capital planning. If we were to securitize all of Resi’s NPLs at the end of the third quarter, under similar terms as its first NPL securitization financing this would provide Resi with approximately $115 [ph] million of additional cash. In March, 2014 AAMC’s Board of Directors approved a share repurchase program that authorizes AMC to repurchase up to $300 million in shares of AMC common stock. During the third quarter, we repurchased 54,465 shares of common stock at an average price of $697 per share. As of September 30, 2014 following all repurchases made during the year, there were approximately 2.2 million AAMC’s shares outstanding a 7% reduction from January 1, 2014. Overall, I’m pleased with the way we have developed and executed our strategy since our spin-off nearly two years ago. Ashish will now provide more detail on Resi’s operations and investment activities during the third quarter and then Robin will provide details on AAMC’s financial performance. I'll now turn the call over to Ashish. Ashish?

[Ashish Pandey:]

Thank you Bill, our focus on NPL resolutions efforts has resulted in a 31% increase and resolutions in third quarter 2014 when compared to the second quarter of 2014. As shown on Slide 5, during the quarter we resolved 15,010 loans with $358 million in unpaid principal balance or UPB. Slide 6 provides details of loan resolutions. NPL conversions to REO constituted approximately 74% of all the NPL resolutions in the third quarter. 1,113 loans were converted to REO in the third quarter, either through foreclosure or deeds-in-lieu. 119 loans were resolved via short sales and third-party sales at 98% of the BPO at the time of acquisition or 95% of the updated BPO value at the time of resolution, generating net proceeds of approximately $44 million. 179 loans were modified and rendered current, 64 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 12.9%. 11 loans were refinanced by the borrower at 137% of the BPO value at the time of acquisition and 106% of the most recent BPO value available at the time of resolution, generating approximately $1.3 million in net proceeds. And 24 loans were repaid in full by the respective borrowers generating approximately $8.9 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. At the end of the third quarter, 197 loans were on trail modification plan. We liquidated 78 REOs in the quarter for total proceeds of 10.8 million. In addition, we identified 324 REOs has held for sale at the end of the quarter. The 15,010 loan resolutions we achieved in the third quarter represent 12% of Resi’s quarterly average loan count of 12,400. If we were to sustain a run rate of 1,500 loan resolutions per quarter, this would result in a substantial majority of Resi’s currently NPL portfolio being resolved within the next eight quarters. Our trend of completed resolutions has maintained an upward trajectory since our inception and we continue to remain focused and quickly and efficiently resolving NPLs. As shown as on Slide 7, at the end of the quarter 216 properties in Resi’s portfolio were leased. More than doubled Resi’s leased properties at the end of second quarter and the property is leased by us; average gross rent per property was 12.6% of the property value at the time of acquisition. 90 additional properties were listed for rent, for the properties that we had renovated through the end of third quarter; Resi’s average renovation expense per property was approximately $19,000 and renovation were in progress on 270 additional properties. 33% of Resi’s tenant have signed for a lease period of 24-months either at the time of lease initiation or lease renewal. Resi has had four leases up for renewal since inception and each of these leases have been renewed. We are extremely encouraged by these initial results which is maintained or increased should have substantial impact on Resi’s overall economics. Please turn to Slide 8 for an update on Resi’s third quarter NPL acquisition activity. In June 2014, Resi agreed to acquire a pool in a privately negotiated transaction. Resi completed the final closing of this transaction in July 2014. In disclosing, Resi acquired 1,243 NPL with $316 million in market value for underlining properties and $216 million in UPB. Resi did not acquire any additional RPLs during the third quarter. Resi also purchased a small pool of 46 loans with $5 million in market value for underling properties and $7 million in UPB. During the quarter Resi also agreed to purchase 246 NPLs with $30 million in market value for underlying properties and $32 million in UPB. The purchase price Resi agreed to pay was 70% of the market value of the underlying property. This transaction is expected to close in the fourth quarter. In October we sold 934 re-performing loans in Resi’s portfolio. This sale included 770 loans from the RPL pool Resi purchased in the second quarter and 164 loans from prior NPL acquisition that have transition to re-performing the status and had a clean pay history of at least six-months. On the sale of loans from the recent RPL pool Resi’s gain on purchase price was approximately 2% and on the sale of loan that had reach re-performing the status Resi’s gain on purchase price was approximately 28%. We are encouraged by the recent pricing trends in the NPL marketplace; we believe that NPL Securitization Financing will enable Resi to generate $150 million of additional cash available for investment. As shown on Slide 9, assuming a purchase price of 70% of the BPO for the NPLs and leverage of 75% on the purchase price, just $150 million of cash could enable Resi to purchase NPLs with up to $850 million in market value of underlying property. If achieved, the additional projected purchase of $850 million would represent 25% increase over Resi’s asset at the end of third quarter. I would now like to turn the call over to Robin. Robin?

[Robin N Lowe:]

Thank you, Ashish. Today, I'll provide more detail on our financial performance for the third quarter of 2014. As you can see on Slide 10, we reported net income of $17.7 million or $6.25 per share for the quarter, which compares favorably to $13.2 million or $4.60 per share for the second 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 the parent and a typical parent subsidiary relationship, but in reality, we do not have a claim on either 100% of the income or the assets of Resi. Also because we own 100% of the voting common stock on NewSource 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 10 and 11 that provide 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 to and not as an alternative for our reported results under GAAP. On Slide 10, we show the revenues of AAMC which consist of incentive management fees of $19.5 million and expense reimbursements of $1.8 million. We also show operating expense of $3.9 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 $2.9 million of compensation and benefit expense. Second we incurred professional services and other expenses of $1 million. AAMC’s standalone net income before taxes was therefore $17.4 million in the third quarter. We believe that these 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 11, we show the standalone balance sheet of residential, NewSource and AAMC. At this time, we would like to open up the call up for questions. Kevin?

[Operator:]

(Operator Instructions).

[Ashish Pandey:]

Operator, if there are no questions I would like to thank everybody for attending this afternoon. Thanks everyone. Have a great day.

[Operator:]

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.