Ocwen Financial Corporation
Q4 2020 Earnings Call Transcript

Published: 10 Feb 2021

[Operator:]

Greetings. Welcome to the Ocwen Financial Corporation Preliminary Fourth Quarter Earnings and Business Update Conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host Dico Akseraylian, Senior Vice President, Corporate Communications. You may begin.

[Dico Akseraylian:]

Good morning and thank you for joining us for Ocwen's preliminary fourth quarter 2020 earnings and business update call. Please note that our preliminary fourth quarter 2020 earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chief Executive Officer, Glen Messina; and Chief Financial Officer, June Campbell.

[Glen Messina:]

Thanks, Dico and good morning, everyone. Thanks for joining us. Let's get started today on slide 3. We're really energized by the great progress we've made across the company. We've executed an incredible business transformation. We're a better balanced and more diversified mortgage originator and servicer. We're stronger, more efficient and better aligned with future market opportunities. We've concluded our strategic review and are excited to announce an expansion of our strategic alliance with Oaktree Capital with their investment in OFC HoldCo notes. We believe our alliance with Oaktree can enable a level of growth and EPS accretion and potential value creation that we cannot achieve on a standalone basis as well as support the refinancing of our corporate debt.

[June Campbell:]

Thank you, Glen. Please turn to Slide 19. This is our fifth consecutive quarter of positive adjusted pretax income. Revenue decreased quarter-over-quarter driven primarily by lower NRZ subservicing fees, resulting from UPB transfer and runoff. We've been awarded multiple subservicing contracts with projected volume $16 billion to $24 billion and closed approximately $15 billion of MSR bulk purchases which should largely offset the lost revenue. MSR adjustment decrease is driven by fair value calibration for higher one-off which reduced the fair value of MSRs in the third quarter. We also recorded $3 million of higher gain during the quarter largely driven by higher MSR purchase volumes. Operating expense improvement is from leveraging technology and productivity actions as we continued to invest in our originations platform. Adjusted pretax income is $15 million $2 million higher than prior quarter as favorable MSR valuation and lower expenses offset lower revenue. Notables in the fourth quarter include a $13 million additional CFPB accrual and $4 million in other legal accruals. We had higher income tax expense during the quarter which excludes tax benefit on fourth quarter legal accruals which we expect to recognize when paid in 2021 and fourth quarter period adjustment to the CARES Act benefit for higher pretax income than previously estimated for the year. We reported a GAAP net loss of $7 million, $2 million improvement over prior quarter and after the $13 million of additional CFPB accrual, I previously mentioned. Please turn to Slide 20. Our balanced business model is operating well. Originations growth and profitability is replenishing the servicing portfolio and offsetting one-offs. On the left side of the slide, you can see that our multichannel platform is fueling strong originations volume with growth up 164% quarter-over-quarter. Servicing originated volume is up almost 4x quarter-over-quarter driving strong replenishment of 267%. Adjusted pretax income was $35 million, $2 million lower than the prior quarter as higher volume was offset by expected margin normalization and $5 million of investment in our platform. On the right side of the slide our Servicing segment is demonstrating strong performance through the refinance cycle delivering improved results quarter-over-quarter. UPB runoff is being replenished through newly originated servicing and subservicing, despite a $16 billion transfer of the NRZ portfolio previously terminated in 2020. We have a strong subservicing pipeline with our top 15 prospects at approximately $85 billion with additional opportunities from MAV. We continue to optimize our cost structure through rigorous process redesign and increased automation driving improved efficiency. Please turn to Slide 21. Our total exposure to loans on forbearance continues to diminish and tracks favorable to our forecast. You can see on the left that both the total number of forbearance plans and the forbearance plans where we have ultimate responsibility to advance continue to decline. As the chart reflects there's a significant difference between total forbearance plans and the amount where we have ultimate responsibility to advance. This is a function and a benefit from our strategy to maintain a mix of owned servicing and subservicing. On the upper right chart you can see that our owned servicing portfolio is performing favorable to other nonbank servicers in terms of percent of loans on forbearance. We are seeing roughly 53% of our borrowers on maturing forbearance plans reinstate and 40% extend. Roughly 4% have progressed to loss mitigation and we are awaiting decision for direction from the borrower on about 3% of plans that have matured. Our expectation is roughly 75% of borrowers on forbearance will reinstate and less than 25% will need some form of loss assistance. Please turn to slide 22. We ended the quarter with $285 million in liquidity. We have made significant investments in bulk MSR market opportunities and originations during the quarter. We invested $190 million in cash before financing to fund $25 billion of MSR originations, $18 billion higher than the prior quarter, largely driven by opportunistic bulk MSR acquisitions. Our originations generated strong cash-on-cash unlevered yields of approximately 12% across all channels. Servicing advances continue to track favorably and actual advances were 29% lower than forecast. Lower advance originations were largely driven by higher prepayments and more forbearance plans performing. Please turn to slide 23. We're focused on our five operating objectives as highlighted by Glen earlier to achieve our profitability goals. We expect to generate positive GAAP earnings in 2021, with low to mid-teen after-tax ROE by mid-2021. This page is a roadmap to achieving these results broken down by operating objectives in originations servicing and corporate segments. I won't go through the details on the call here today, but please let me know if you'd like to review at another time, as we have to go through the details. Now I'll turn it back over to Glen.

[Glen Messina:]

Thanks June. Wrap up, let's turn to page 24. As I said at the onset, I'm just energized about the opportunities and our potential for 2021 and beyond. We've radically transformed Ocwen. It's a better balanced, diversified, mortgage originator and servicer. Our strategic alliance with Oaktree can provide almost $0.5 billion of incremental capital to enable a level of growth, EPS accretion, and potential value creation that we could just not achieve on a stand-alone basis. We're stronger, more efficient, and better aligned to future market opportunities as a result of all the hard work of the Ocwen global team. We're delivering record growth in originations, and we continue to reshape and diversify our servicing portfolio. As we look to the opportunities ahead, we believe, we're fairly well positioned to capitalize on the potential future growth opportunities in multiple market segments. Yes, in 2021, we're focused on executing five straightforward objectives to drive improved value for shareholders and achieve our goal of low double-digit to mid-teen after-tax return on equities by mid-2021. And none of this would be possible without all the hard work of our global Ocwen team. So, I want to thank our Board and global team members for their tireless efforts to transform Ocwen and their service to homeowners' communities and investors. And with that, Shamali, let's open it up for questions.

[Operator:]

Certainly. At this time, we will be conducting a question-and-answer session. And our first question is from Lee Cooperman with Omega Family Office. Please proceed with your question.

[Lee Cooperman:]

Thank you. You've provided a tremendous amount of information here, as I have spent some time digesting it, but I congratulate you. Based upon everything you've said, it seems very positive. I'm a little confused and I have a feeling that has to do with time frame. On page 3 of the presentation, you talk about low-digit -- low double-digit to mid-teen after-tax return on equity. And then on page 8, you talk about $10 to $12.10 a share in earnings. Number one, what is the pro forma book value now after the second transaction with Oaktree? What are we looking in terms of book value?

[Glen Messina:]

Yes, Lee, based on the current $414 million of equity capital at Ocwen, our current book value per share and this is on page 27 of the presentation for future reference is $47.65. And after execution of all the warrants that were granted to Oaktree and again assuming the proceeds from those warrants come into the company, related to executing those warrants. We would expect the diluted book value per share to be $44.87, again starting with the $414 million.

[Lee Cooperman:]

Okay. So the return on equity of low double-digit to mid-teens, should be applied against that $44.87 number?

[Glen Messina:]

I don't think so, Lee. So it all depends on when Oaktree executes the warrants, right? So, if they execute them right upfront then obviously the additional capital comes in the business and the dilution happens. We're assuming in our targets that the warrants aren't immediately exercised. They wouldn't be exercised until some future date. So our low double-digit to mid-teen returns is really focused on the $414 million of equity.

[Lee Cooperman:]

Well, so the $10 to $12.10 of incremental earnings what time frame are we talking about? It's obviously not 2021.

[Glen Messina:]

Yeah. Lee, we think it will take about two years to fully invest all the proceeds that are coming in from Oaktree both in terms of MAV as well as the on book capital. We'll obviously invest it as fast as we can. And obviously, it's a great market environment now. So I think there's lots of near-term opportunity to invest. But for purposes of what we laid out here, we are assuming it takes about two years to invest the proceeds.

[Lee Cooperman:]

Okay. So the two years generate incremental $10 to $12 in earnings then the return on equity would be materially different?

[Glen Messina:]

Yeah, that's right, Lee. So again, if you do the math coming off of page 27, it would imply a return on equity of about 22% to 26%.

[Lee Cooperman:]

Right, right. Just a few other questions if I may. Oaktree has access to information that public doesn't have which is understandable since they've made such a large investment. Can we derive some comfort from their willingness to invest close to $0.5 billion as regards to CFPB litigation?

[Glen Messina:]

Look, Lee as you might imagine Oaktree putting up almost $0.5 billion of capital into the company. They performed the requisite diligence that's commensurate with that size of investment. And look I think their commitment to the company the size of their investment and the duration of their investment, reflects a strong commitment to the company and our growth potential and obviously they evaluated the risks and opportunities associated with the company. And we're excited to have them as a partner. I think it takes the company to a whole new level having Oaktree as a partner.

[Lee Cooperman:]

Okay. With this new capital coming in I assume the refinancing will no longer be conditional that the refinancing will move ahead?

[Glen Messina:]

Look, it's got to be – certainly market conditions can always impact any refinancing. But look we feel really good about the Oaktree Capital coming in, and how that sets us up to do the refinancing. It's a great market in the high-yield market. We're going to – obviously time is of the essence so we want to react quickly here. But again, we think the Oaktree additional investment here is a huge boost in our ability to execute our refinancing plan.

[Lee Cooperman:]

Last question, really revolves around cost of capital. People like PFSI and COOP are financing at around 4.5% without warrants. We're taking 12.5% money and giving warrants. Are we cost competitive vis-à-vis our competition given our cost of capital?

[Glen Messina:]

Lee, look based on where return leverage returns are in the MSR environment today and the fact that we're not growing solely through on book capital we're using MAV for example to create additional fee income, which enhances our base level of return on equity I think we are. One of the things that we've done in the business to drive our improved competitiveness is we just relentlessly focused on cost and operational execution. And they go hand-in-hand. So just cutting costs without improving operational execution just creates cost in a different way. So look we will continue to be passionate and resolute in driving an industry best practice cost structure in the business, which helps offset our cost of capital as it exists today. But look Lee as the business improves and as profit improves, we expect it will produce – it will help us lower our cost of capital over time.

[Lee Cooperman:]

Right. And just as an observation it's far off into the future, it's not now. But given where the stock trades and your pro forma book value and the anticipated $10 to $12 of incremental earnings, are we going to generate the free cash flow to take advantage of Mr. Market where we could shrink equity to offset some of this dilution that we're creating through the warrants?

[Glen Messina:]

Yes. Lee, one of the benefits of having this incremental capital come in to support on book MSR investments is, on book MSR has generated great cash flow. They have very strong cash flow dynamics. So as we continue to invest and scale up our operation and take advantage of our scalable and efficient platform, we expect cash flow will improve, along with the earnings of the company. And EBITDA so to speak will improve with earnings of the company. And under the current HoldCo note structures as I mentioned earlier we -- assuming the refinancing gets done we'll have structurally increased flexibility to execute share repurchases as long as we're on target with our growth expectations and profit expectations.

[Lee Cooperman:]

All right. Thank you very much. Good luck. And congratulations on your refinancing.

[Glen Messina:]

Thank you, Lee. Appreciate it.

[Operator:]

Our next question is from Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question.

[Marco Rodriguez:]

Good morning, everyone. Thank you for taking my question.

[Glen Messina:]

Good morning.

[Marco Rodriguez:]

Hey. I was wondering if maybe you could talk a little bit more about the strategic review process. Just kind of – obviously, I understand the -- what has been done here terms with Oaktree. But I'm just wondering if you could talk a little bit about the other potentials that you kind of reviewed and just kind of frame them in terms of compare and contrast if you can between what you guys basically executed right now?

[Glen Messina:]

Yes sure. So Marco, as I mentioned earlier and mentioned during the course of 2020 as the strategic review is ongoing, all options were on the table. So we did have a very broad outreach to many players within both strategic and financial investors and we did have reverse inquiry come into the business as well because it was a public process. We're open about it. We looked at a variety of different things from refinancing transactions to potential merger transactions. As I said earlier, there really were no actionable merger opportunities. I want to say that we got great feedback during the strategic review process, people were impressed by the turnaround performance here in the business and the transformation that we've done. But from an M&A perspective or a merger perspective, look this is a very hot originations market. As you can see in the press and the papers and the industry, a lot of folks with big originations platforms are looking to monetize their investment and are looking to get bigger in originations. So we found that look from an M&A perspective, there generally, I think valuation expectations are very high amongst originators. And as a result I'm just not sure there was anything as compelling quite frankly as the Oaktree proposal. As it relates to the Oaktree proposal, there were other similar structures that were presented during the course of the process. It was a -- obviously people executed confidentiality agreement. So we didn't necessarily share information across people, but you can't do that. So, but look Oaktree was not the only proposal with this kind of structure, but it certainly was the most competitive. And we believe the aggregate commitment of capital and again their relationship on the MAV side as well as the PHH side, the Ocwen side of the house creates a terrific alignment of interest across the business. So we intend to work cooperatively, built a great relationship with folks over at Oaktree, we're excited about working with them going forward.

[Marco Rodriguez:]

Got it. Very helpful. And then in terms of your origination volumes in the quarter pretty substantial growth sequentially. Can you maybe talk a little bit about the drivers there?

[Glen Messina:]

Yes. Our originations team is doing a terrific job. The enterprise sales model that we've put in place, which again allows us to sell the total portfolio of what we do, so bulk purchase of MSRs using the agency co-delivery methods, the cash window, our correspondent channel, offering portfolio recapture services, offering subservicing, our special servicing capability, it's a very broad and comprehensive product set. Our enterprise sales team does a great job selling that. You could see we had -- we've tripled the number of sellers that we deal with in our flow and co-issue and correspondent program. And the team continues to ramp up, right? So we're targeting 450 for next year. And we're going to continue to expand products and introduce Ginnie Mae and non-QM and Jumbo and expand our services as well. So bringing in our best efforts delivery and non-delegated as well. So, look the enterprise sales model for us has just been terrific. We've gotten bulk. We've gotten subservicing new S&P sellers, it's really helped us build the originations platform, but look we're not done. I think there's more opportunity here. And frankly, I think we're just scratching surface. There's a lot of services and products we could bring into our originations channel that other competitors have today and we don't. So we think there's an opportunity to enhance our competitive position here.

[Marco Rodriguez:]

Got it. And last quick question here for me. Just looking at your earnings and profitability framework for 2021. Can you maybe just talk a little bit about what you see as the biggest growth drivers there and then perhaps also frame where you might need to do a little bit more work to kind of obtain these goals if you will?

[Glen Messina:]

Yes. So the biggest growth drivers are obviously on book servicing, so building or rebuilding that owned MSR portfolio. And as well enhancing that by substantially building out, our subservicing capabilities, our subservicing earnings contribution from MAV. So those are really the two drivers of what's going to fuel the earnings performance of the business. And as I mentioned to Lee, it also -- obviously, the owned servicing has very strong cash flow dynamics. So that helps build the cash flow performance of the business, which then creates capital to reinvest right in more MSR. So it becomes kind of the flywheel effect, as you begin to move the business forward. It's all about scaling up originations for us in terms of delivering that capability. Now we are expecting to see a relatively robust bulk market. It has been very active so far in the first quarter. It was very active in the fourth quarter. We closed $15 billion of bulk transactions. We are seeing activity here in the first quarter. So, continuing to expand our activities in the bulk market kind of job one, right? So that helps us fill MAV and fill our books quickly. But we also want to continue to grow that correspondent seller base and grow our flow programs. Again, I think we're just scratching the surface. If you have a mature correspondent platform you probably have 600 to 700 sellers -- active sellers at any given point in time. And again, we're only half of that, right? So scaling up the originations team scaling up our sales team getting more feet on the street, getting out there and being more present and visible in the market expanding those products and services will really help us fuel the growth of the correspondent platform.

[Marco Rodriguez:]

Got it. Thanks a lot guys. I really appreciate your time.

[Glen Messina:]

Hey, thanks, Marco.

[Operator:]

And we have reached the end of the question-and-answer session. And I will now turn the call over to President and CEO, Glen Messina for closing remarks.

[Glen Messina:]

Thanks Shamali. Hey, everyone, thank you so much for taking the time to be on our business update call today. Again, just couldn't be more energized about the opportunities we have in front of us for 2021 and beyond. The whole Ocwen team here has just been moving at an incredible pace to radically transform this business and create significant amount of opportunities ahead for us to grow and mature and expand our business. I'm grateful and appreciative to the team at Oaktree who worked tirelessly with us as well through the strategic process and just very much appreciate their vote of confidence in the business and our leadership team. So thanks everyone. Appreciate your support and look forward to talking to you at the end of the first quarter.

[Operator:]

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.