Altisource Portfolio Solutions S.A.

Good morning, and welcome to the Altistar Second Quarter 2020 Earnings Conference Call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, during which you can dial star 1 if you have a question. Please note this conference is being recorded, and I will now turn it over to Michelle Esterman, Chief Financial Officer. You may begin.

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. The inherent uncertainty of the impact of future events on Altisource is also impacted by Auckland's recent communication to us that it has been directed by an MSR investor to move field services and other service referrals from Altisource to another service provider. Please review the forward-looking statements section in the company's earnings release Quarterly Slides, and Form 10-Q, as well as the risk factors contained in our 2019 Form 10-K and First Quarter Form 10-Q, which describe factors that may lead to different results. We undertake no obligation to update these statements as a result of 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. 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 would now like to turn the call over to Bill.

Thanks, Michelle. Good morning, and thank you for joining today's call. This morning, I will provide a brief summary of our second quarter financial performance and discuss the operational and financial impact on Altasource from COVID-19 and Aquin's communication to us that an MSR investor is directing it to move certain service referrals historically provided to Altasource to another vendor. I will also cover our objectives for the balance of the year, including our preparation to capture the countercyclical opportunity from higher delinquencies and our plans to reduce internal costs and grow earnings. As a result of the pandemic, AltaSource is facing an unprecedented and challenging business environment with industry-wide second quarter foreclosure initiations down by approximately 85% and lender-completed foreclosures down by 75% compared to the second quarter of 2019, despite the 306% increase in seriously delinquent loans over the same period. Turning to slide five, As anticipated, our second quarter revenue of $91 million, adjusted pre-tax loss of $10 million, and adjusted EBITDA loss of $2 million reflect the full quarter impact from COVID-19, which was partially offset by our cost reduction efforts. Since the national emergency was declared in March, federal and various state governments have taken measures to provide financial support to residential mortgage borrowers, including mortgage forbearance programs, and foreclosure and eviction moratoriums. For varying lengths of time during the quarter, most states enacted stay-at-home orders and restricted services to only those deemed essential. These measures significantly reduced our default-related referrals and revenue for the quarter. Strong growth across our origination-related businesses from a historically low interest rate environment, success from our business development efforts and a rebound in June home sales partially offset these declines. As you can see on slide six, second quarter revenue from customers other than Aquent, NRZ, and Resy in our core lines of business was 5% higher than the second quarter of 2019, driven by strong growth in our origination-related businesses, partially offset by a decline in some of our default-related businesses, primarily from governmental actions related to the pandemic. In this difficult environment, we acted quickly to reduce costs, worked to mitigate the impact to our customers and supported the safety of our employees. As a result, the vast majority of our staff are working from home, and we are able to preserve cash, ending the quarter with $68 million in cash and cash equivalents. Keep in mind that this excludes our marketable securities. For a more detailed description of our second quarter financial performance compared to prior periods, please refer to today's press release and Form 10-Q. We anticipate this short- to medium-term pressure on our default-related businesses to continue. Governmental forbearance programs and moratoriums temporarily prevent servicers from pursuing foreclosure of delinquent loans. More recently, as set forth on slide seven, Aquinn advised us that an MSR investor instructed it to move certain referrals for field services to another service provider beginning in July, with a balance anticipated to be moved over the next couple of months. Aquin also advised us that this same investor intends to instruct Aquin to utilize a different provider for certain other services at unspecified future dates. We believe the MSR investor providing this direction is NRZ and that the referrals are being moved to service businesses that NRZ either owns or in which it has invested. We believe that these actions violate our agreements with Aquin and we are currently in discussions with Aquin to address this matter and have reserved all rights. We estimate that revenue from the NRZ portfolios, excluding revenue we earned from our cooperative brokerage agreement with NRZ, represented approximately 39% or $79 million of our first half 2020 service revenue, the majority of which is in the lower margin field services business. We estimate that the field services portion of this service revenue was $58 million. Because it is difficult to predict the timing of the potential change of Altasource as the service provider, Our 2021 forecast conservatively assumes that we don't generate any revenue from these portfolios. The investor's decision to change service providers does not impact the cooperative brokerage agreement where we provide REO brokerage and auction services to NRZ. To address lower than previously anticipated revenue from AQUIN and the extension of foreclosure and eviction moratoriums, we are developing a plan to implement additional cost reduction measures. As you can see on slide 8, based upon our current planning, we are forecasting Altasource to generate 2021 service revenue of $250 to $270 million, adjusted EBITDA of $35 to $43 million, and adjusted EBITDA margins of 14 to 16%. This forecast includes the anticipated impact from the pandemic, the loss of service referrals from the Aquan MSR investor that I just discussed, and our anticipated cost reduction measures. We believe there is a substantial opportunity for revenue growth and margin improvement from these amounts in 2022 and beyond. Given the very volatile environment associated with the pandemic and the recent aqua news, there is greater uncertainty that could cause our actual results to differ materially from our forecast. We believe that despite these near-term headwinds, we have a strong set of mature and comprehensive real estate and mortgage businesses that are well positioned and ready to capture the opportunity from the higher delinquency environment once the temporary governmental programs are lifted. Keep in mind that the default business for AltaSource is not lost. Rather, it has been pushed off as a result of these programs. In a normal market, we estimate that for every 1% increase in delinquency rates, the addressable market for our default-related services increases by approximately $700 million. Based on the increase in 30-plus day delinquencies since the beginning of the year, We estimate that the addressable market for our services has grown by over $2.7 billion. With our attractive and growing customer base, we should begin to benefit from the growing addressable market as the temporary governmental relief expires. Turning to slide nine and our business objectives. As we look to the balance of the year, we have three primary objectives. First, preserve cash. Second, position the default related businesses for tremendous medium to longer term upside. and third, continue to grow our origination services businesses. Beginning with our objective to preserve cash. Our top priority is to preserve liquidity given our current environment. Altasource has a capital life business model with a highly variable cost structure. As I discussed earlier, we are developing a cost reduction program to achieve our 2021 financial objectives. This should leave Altasource in a good position when demand for our default related services returns and grows. This brings me to our second objective.