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spk01: Good day and welcome to the AAMC Investor Call. Today's call is being recorded. At this time, I'd like to turn the call over to Donya Sawyer. Please go ahead.
spk07: Good morning, everyone, and welcome to AAMC's Q4 and 2022 Annual Earnings Conference Call. I'm Donya Sawyer, the new Chief Operating Officer of Lending Operations at AAMC. Before we begin, let me remind you that today's press release and the presentations made by our executives may include forward-looking statements. as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to 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 Kopchak. 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.AltasourceAMC.com. And now I'll turn it over to Jason.
spk03: Thank you, Danya. Danya, as mentioned, is a new chief operating officer of our alternative lending group. We are extremely happy to have her on our team. She started her career at Countrywide. and she brings over 20 years of experience across the mortgage and alternative asset industry. She 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 is Steve Krollman, our Chief Financial Officer. Turning to our Q4 financial performance at a high level is as follows. For the fourth quarter, AAMC generated a loss of $4.1 million on revenue of $2.5 million. I would like to highlight several factors here. One, revenue improved relative to Q3 by increasing of $600,000 or 33%. 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 secured by one to four single-family residential or multi-family residential properties going through value improvements, also known as residential transitional loans or RTLs, as well as long-duration interest-only secured by income-producing residential properties, also known as DSCR loans. Such products are distributed to institutions with permanent capital, such as insurance companies, pension funds, and endowments. I have 15 years of unique experience and relationships with these institutions. Unlike our peers, we do not use loan securitizations as an exit for our loans. Instead, we establish individual criteria or a buy box to sell loans to insurance companies or other funds that are backed by endowments and pension funds. 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, direct to borrower, wholesale, broker direct channel. Back-end purchasers must be in place before we can ramp up our origination platform. 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, and endowments have 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 that is constantly resetting to the market. The typical metrics include short-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 risk, 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 is short duration notes, collateralized by one to four single family or multifamily residential properties that are going through value improvements. Turning to our accomplishments. In Q4, we closed on our second warehouse, $50 million warehouse line. We closed our first forward takeout with a $55 billion plus 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. Turn to our Q1 2023 goals and operating standards. Our expected gross revenue per loan for RTLs is a range between 300 basis points to as high as 450 basis points. Our term or DSCR 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 acquiring a client on the directed borrower channel to be around $1,500 for a client and over time is spread over multiple loans. My historical experience is that we can improve costs to capture clients from 1500 to 800. Our expected cost to process a loan is $160 per file. This represents a significant competitive advantage due to having our loan production principally in Bangalore, India. Our expected average loan size for RTLs is approximately 500K. while the expected average loan size for DSCR term loans is $300K. At the March 20th, we have a pipeline direct-to-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 17th, we have committed volume of $15 million. We plan to roll out our broker direct channel over the next three weeks.
spk06: With that, I'll turn the call back to the operator for questions.
spk01: Thank you. If you would like to ask a question, you may signal by pressing star 1 on your telephone keypad. Once again, star 1 for questions. As we assemble the queue, I'll turn the call over to Steven Carlman for pre-submitted questions.
spk06: Thank you, Katie.
spk02: First question we have. What, if any, impact have we felt or could we be exposed to in light of the recent crisis of confidence in the U.S. regional banking sector?
spk03: That's a great question, Steve. And in this environment, we've filled that question many times. So we haven't experienced any issues. Our takeoff partners are permanent capital providers that are not affected by the short-term fluctuations in the capital markets. Our capital partners are not dependent upon unstable deposits, or the securitization market. That's the beauty of our business model. Furthermore, it's more clear than ever that our product is a hedge. Our product is short duration, high yield, and the underlying collateral is improving over the duration of the loan. State of Nashville has 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. second question yes we have one additional question have we lost access to any lines of credit that we had previously negotiated for no actually flagstar who's owned by new york community bank reached out to us about increasing our line if you've seen the in 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 has materially ran up since the news of the acquisition of Signature's deposits. So, we feel very good with both our bank lenders, our house line providers.
spk02: Thank you, Jason. Back to the operator for further questions via the phone request.
spk01: Thank you. As a reminder, Star 1, if you'd like to ask a question, We'll take our first question from Jeff Moore with Burr Oak Capital.
spk05: Hey, Jason. Good presentation. Really helpful and whatnot. My first question is, how is the stock repurchase plan coming?
spk03: We purchased about $1.2 million in stock repurchases. That information will be in our 10-K filing out on Monday. Okay.
spk06: Okay, fantastic.
spk05: Okay, and then given the kind of progress with the business and whatnot, I did want to ask a little bit about the pipeline that you had laid out. When you're talking about that $35 million number, can you give a little bit more clarity as to what that means? Because it sounds like you had $25 million that was like, kind of pot committed, those deals are going to close. But would you be a little more clear on that, 35?
spk03: No, absolutely. So that's a great question, Jeff. So when you look at $35 million, what we're seeing is we have borrowers who have moved forward, signed term sheets, we've ordered appraisals, it's in process, headed towards a closing. So we just turned on our marketing. We have $35 million committed direct-to-borrower. We have behind that, you know, we're in talks with another between $25 and $40 million of prospects who are interested in acquiring loans or getting rehab loans from us. So we just recently turned on our originations, and we're sitting around 50 to 60 million in direct originations. So that's where we're at. It's just a different stage of the process. So that's the difference between a 35 and 25. 35 is committed by the borrowers, and then 25 we're in talks with.
spk05: And then you've got another 15 in wholesale. So the quick math on that would be, you know, great question.
spk03: Go ahead, Jeff.
spk05: Well, so you get 50% of the 25 million that's in process that, you know, let's just call that 15 million. So you're basically in all likelihood going to be getting say $65 million in originations from kind of what's in the pipeline now without really getting more marketing going. or your broker channel out. So, you know, the timeframe for closing one of these loans is probably what 30 to 45 days. Exactly.
spk03: So I think what you're saying is exactly, we just turned on the originations. What we found is, you know, we're working with a pipeline of between 50 and 60 million with just turning on the direct to borrow originations. Obviously as we smooth things out, we can increase our market penetration there. Wholesale, We 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 the underwriting. So right now, we've literally turned it on with one counterparty. We have 15 million in committed loans. We have probably another seven to eight that we're going to roll out in the next two weeks counterparties. So what we're trying to do in an organized fashion, roll out the wholesale side, because frankly, we're very confident between the calls we receive and the requests we receive, there's a tremendous amount of demand to face us on the wholesale side, which 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 15 million submissions. We have another five to eight that we're going to turn live on in the 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 that on yet as we haven't started marketing directly brokers in our space brokers are a very important part of the business um and we incidentally work with brokers but frankly we haven't started um focused our marketing towards them which we plan on doing over the next three to four weeks and that's it that's a third channel That we expect to see material volume coming in from originations. So. You know, if we're sitting at 50 to 60 million directed borrower, 15Million from a week, the 1 week being turned on a week. I'd say that's from, like, 3 days. I think you can extrapolate that the ramp. Should be pretty strong over the next 30 or I'm sorry over the next 3 months with our business.
spk05: Yeah, 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 should we expect profitability for the company?
spk03: Yeah, look, I mean, at the end of the day, you know, I've provided metrics, some framework to how we're looking at the cost infrastructure and the revenue side of it. I'm as eager as anybody to turn a profit. I think it's most important for us to focus on our production, as your first question is around our production. So I'm very focused on getting all three channels live. I don't want to give a forward statement, but, you know, my interest is aligned with shareholders and getting it – we're looking at getting profitable on a monthly basis as soon as possible, and I don't think it's going to be terribly far. Okay.
spk05: 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 wholesale channel a little bit more and whatnot and the broker channel, how are you going to be able to underwrite, like, all those loans? That seems like a lot.
spk03: So, look, we're pretty staffed. We're staffed pretty well. We edit everything. a fair amount of staffing in 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'll have to add a couple processors or more processors, but frankly, we feel good that our current team can handle upwards of $100 million, $150 million a month in the standard, maybe adding one processor. But There's a lot of slack out there and talent between Bangalore and here that we could hire pretty easily. We've been out looking at what's out there in supply of labor, and we feel very good that if we need it and if the demand's there, we can add the people and the talent to process the loans. That's not a concern of ours.
spk05: Okay. What are the operating processes and stuff like for that? What are some of the differences with having a really remote workforce, and how does that kind of play into just how you guys are going about operating with the loan origination and whatnot?
spk03: Yeah, so that's a great question. And look, I'm going to turn that over to Donnie in a second, but just to be clear, You know, I worked on the street. I worked at Morgan Stanley and Demora and we had offices all around the world. We have people working all across the country as well on the road. Things moved through pretty seamlessly. And the reason we brought Donya aboard because she's had a tremendous history in building out these platforms as well as reviewing these platforms. So with that, I'd love to let Donya answer that. Donya, are you here?
spk07: I am, yes. And Jeff, thanks for the question. So as Jason kind of highlighted earlier in the call, You know, we do have a pipeline that is in various stages at this point more heavily weighted in the earlier stages, and 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 forms, making sure that we have automated processes to the extent possible. You know, some of the things to hit on specifically, Jeff, is We're trying to make it easier to process and underwrite these loans. 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 custom deal. And toward that end, we've created a lot of tools. So think about kind of a rudimentary automated underwriting system that's at this point an Excel-based model, at some point in the future a web-based form that not only can be used internally but by loan officers to more quickly identify whether or not they have qualified deals, but also externally facing to broker partners. We're doing things like creating standardized forms for 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, I think we're trying to get ahead of things to eliminate duplicate processes for borrowers and broker partners. Obviously, there's a lot of touch points in the loan manufacturing process with external vendors that we have to coordinate with. We want to make sure that to the extent we have special endorsements on our construction products or state-specific considerations, that we're making those requests of local title earlier in the process so that we don't run into 11th hour issues. 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 those scalable workflows.
spk05: Wow. Well, it sounds like you're definitely ahead of a lot of the local banks I use for loans on my property. So that's really good stuff to hear. Thanks, Tanya. No problem, Jeff. I'll... I've got some more questions, but I'll hop off and I'll circle back if there's anyone else in the queue.
spk06: Thank you. We'll take our next question from Matthew Howlett with B. Riley.
spk04: Thank you. Thanks. Good morning, everybody. You know, look, the capital, I really have a strong appreciation for the capital. I'm not selling directly to to the life insurance companies or the big asset managers. I guess that's my question on what's the outlook? You signed up, you said here, a pretty big asset manager that owns a life insurance company. What are your conversations like with additional ads on that side? What are you hearing? What's the appetite to enter?
spk03: That's great, Matt. That's a great question. 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, you know, we're, we're currently signed up with three or I think possibly four takeout partners. Three of the four partners have pockets of money for life, life insurance. We're in addition, we're talking to probably another six to eight, I would say three quarters of those are life companies and another three to five money managers, you know, on the insurance side, it can't get enough product. It's just, you know, we could originate 300 million a month and it, you know, we couldn't sell the buckets. So there's massive amounts of my capital. They're under pressure to figure out different ways to deploy, um, their, their capital into above market rates that getting away from the liquid agency market. And so there's tremendous amount of cattle being raised in insurance companies. We see it like it's, it's not a matter of, uh, um, do they have enough balance sheets? They can't get enough product. So, but it's a long process when you sign up with insurance companies they just don't sign up with anybody they pick a handful of partners and they work with those people because you know 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 product and with us having a long history with our team in india with our management team here you know we are a pretty solid model for you know for these light codes to partner with and so with that being said We found at the beginning of the year the life coats have a ton of capital, and the money managers are some that are bullish and some that are sitting on the sidelines with the money managers.
spk04: So do you think you're almost up to talking almost 10 counterparties, and what would the flow arrangements look like? How big would they be? I heard you say you could do 300 – I mean you said the man is just sensational. So could you just give us a sense how big each of them could be?
spk03: So let me step back a second. So right now we're standing up with – I've got to double-check – for sure three, if not four, counterparties. We're in talks of another seven to eight. On the term side, the DSCR product, we could originate – just on the term product, we could originate $200 million, $300 million a month, and I still wouldn't be able to fill the various insurance companies we're talking to. So these insurance companies have a mandate to – and we're talking to each one of them. I couldn't even tell you. It's going to be in the tens of, you know, it's going to be like, I would assume they have a mandate to deploy $3 to $5 billion at least each in DSCR paper, if not more. And so with that being said, if we're originating $200 million a month and that's $2 billion and we distribute that to three different groups, that's $700 million per insurance company. It's a scratch in a bucket. Okay. So typically you don't have caps on how much you can sell. to each insurance company but you know an ideal role to become relevant if you're selling a monthly basis 75 million to to an insurance company you become relevant to them so you know for us the target is to you know be selling 75 million at a clip a month to each insurance counterparty that we're dealing with like we don't want to sell 5 million 10 million because it doesn't We're not, we won't become irrelevant to them. So we, we have to quickly get to 75Million a month because then we become very, we become a partner to these insurance companies. So that's on that's on the term side. And then we look at the transitional. Side typically is similar. If you're going to sell the insurance companies, you got to sell. Typically 50 to 75Million are, you know, slugs in order to become relevant. So. They're not gonna look at you unless you get to that size. So. And with that, you know, that's our strategy is to get to that kind of level. We're capable of getting that kind of volume numbers. I think the counterparts we're talking to and we're signed up with know we can get there, and that's why they signed up with us directly. So, yeah, hopefully that helps, Matt.
spk04: No, it does. And thanks for clarifying that. It's certainly great to hear about what, you know, what they're seeing on the other side. It's just – you know, the fact that you can deliver them this product is just an 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. I'm just curious what's driving that. And, you know, do you think the 350 margin, what's long-term do you look at as sustainable for you?
spk03: You know, so look, I've been around this space a long time. And so I've seen, you know, on the RTL side, on the transitional loan side, know i've seen margins of why it's five six hundred points so you know typically you know as the market has more involvement so when there's more securizations and more players in the spread is actually wide now so you know current in the current market when there's a shakeup that's going on it went on last year in the in the securitization market and this year's going 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 you know, the infrastructure to handle a tough environment. So, you know, again, when we start able to originate 50, 75 million a month, that's the ability to deliver into insurance companies. With that being said, we've noticed there's a lack of liquidity. And when I say that, borrowers just can't go to any shop now and close their loans. A lot of these smaller to medium-sized players are getting shook out. That's why a lot of these guys are coming to us for us to fund wholesale-wise. So with that being said, our spreads have widened. Our spreads have widened because we're a liquidity provider. So we know that 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 strong takeout 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 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 a very positive, we have a competitive advantage on that side. On the DSCR side, same thing. What we're seeing is there's insatiable demand by insurance companies for a DSCR product. As a whole, there's competition, but there's a lot of originators who aren't structured properly. And so they're getting washed out. So on the term side, we see a little bit more competition than we do on the RTL side. But the fact is the market's shaking out people right now, and it just gives us more pricing power. So that, you know, I think we're positioned right. The market's turbulence lately is causing us to be in a position of strength. So that goes to 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 who are going to be a value add. It's simply this point, how much effort do we have to put in to get our production to where it needs to be? And we have those three channels. The channels are direct-to-borrower, wholesale, and then shortly, broker channel. So did it help, Matt?
spk06: Absolutely. Look, incredible margins nonetheless, and I really appreciate all the color. Thanks a lot, Jason.
spk01: Thank you. We'll take our next question from Jeff Moore, Burr Oak Capital.
spk05: With rising rates and a lot of the bank failures that are happening, how does that affect your model? And then if lending freezes up with banks, what do you think you'll be able to do with originations and sales? Is this a better environment for you? Is it a worse environment? What are your general thoughts on that?
spk03: Yeah, look, great question. Similar to what I mentioned to Matt. When banks, like right now, we're going into a tough environment for banks, they have a tendency to lend less. So you'll see their lending pulls back. And so with that being said, that's a positive for us. The more that the peripheral banks pull back, the street firms are in love with the space just because they don't quite understand it. So the fact of the matter is there's less competition. It gives us more pricing power. This is a natural product. The insurance companies love the product. The insurance companies can't get enough of it. And frankly, I've had plenty of conversations. The insurance companies know they're in the driver's seat right now. They know it. And so, you know, to answer your question, is in this environment, long-term, it's very beneficial for us. You know, this puts us, it weeds out some of the weaker players. It allows us to take more market share. It gives us more pricing power. And it allows us to build out our process. So it's a win-win for us. Look, on the street, the one thing you learn, one thing I've learned over my 15 years of working on the street is volatility creates opportunity. At the end of the day, you know, there are people who are heading for the sidelines. But, you know, being very experienced, this is a market that creates opportunity. It's very important for us to capitalize on the volatility. And, again, it's a great opportunity for us. Our product is a natural hedge. Again, it's a high-yield product, short duration that resets often. The underlying collateral is always improving over the life of the loan and has a lot of enhancement to it. So it's a natural hedge that what would you rather have? Would you rather have a mortgage bond at 350 basis points or would you rather have a loan book at 11% that has 30 points of equity that when you're done with it, it has 40 or 45 points of equity? It's a no-brainer.
spk06: Okay.
spk05: Okay. How much line of credit availability would you need to have to do, say, $200 million or $300 million a month in originations, or even kind of the numbers that we can kind of pencil in that you're probably going to be doing at some point?
spk03: Well, look, we have $100 million right now. Frankly, we should be able to turn those lines three to four times a month without being pressured. So our current warehouse line capacity could more than enough handle $200 million to $300 million in production. As I mentioned earlier, our lenders come to us asking us if we want more balance sheet, more warehouse line. They like the product. They like the yield. And they like the profile of the asset. So they've offered up increasing our facilities. The goal right now is to focus on production. But we have enough warehouse line to hit the numbers that you're indicating. And we have enough people in the back office primarily to get to those numbers as well.
spk05: Okay. I guess my last question is, are there any updates on the Luxor or the Redleaf lawsuits?
spk03: Yeah, that information is going to be in our 10-K, which will be filed on Monday. So, yeah, it'll be there. There's no real material updates, but that information will be in the 10-K. That will be out on Monday.
spk05: Okay, cool. Well, thanks very much, Jason. Great stuff. And looking forward to the next call.
spk06: That sounds good. Thanks, guys.
spk01: Thank you. With no additional questions in queue, I'd like to turn the call back over to Mr. Kopchak for any additional or closing remarks.
spk03: Again, thanks, Katie, for the intro. Finally, I just want to say I'm excited to be the team. I'm excited by our team's accomplishments this year. Since I joined last July, 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.
spk06: Thank you. That will conclude today's call. We appreciate your participation.
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