Altisource Portfolio Solutions S.A.

Ladies and gentlemen, today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Thank you. Thank you. Ladies and gentlemen, thank you for standing by, and welcome to Ultrasource Fourth Quarter 2021 Earnings Call. At this time, all participant lines are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star, then zero. I would now like to hand the conference over to your host, Michelle Esterman, Chief Financial Officer. Please go ahead.

Thank you, Operator. We first want to remind you that the earnings release, form 10Q, and quarterly slides are available on our website at www.alzysource.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. Please review the forward-looking statements sections in the company's earnings release and quarterly slides, as well as the risk factors contained in our 2020 Form 10-K, 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 Shapiro, our Chairman and Chief Executive Officer. I will now turn the call over to Bill.

Bill Shapiro Thank you, Michelle. Good morning, and thank you for joining today's call. This morning I will discuss the progress we are making in our core origination and default businesses, describe the terms of our recently announced agreement with Aquin, and provide a brief overview of our first quarter financial performance. Turning to slide three in our origination business. We are pleased with the first quarter performance and, more importantly, with our long-term prospects. We generated $16.8 million in revenue, which represents 68 percent growth compared to the first quarter of 2020. This growth reflects sales wins, greater market penetration with our existing solutions, the rollout of a new employment reseller solution, and a strong origination market. For the full year, we believe we are on track to grow revenue in this business by approximately 40 to 50 percent compared to 2020, significantly outpacing the MBA's forecast for a 14 percent decline in origination volume. Growth in our origination business further diversifies our revenue, as almost all of our 2021 forecasted origination revenue is from customers other than Aquin and NRZ, and no one customer represents more than 11 percent of first-quarter revenue. The next couple of slides provide you with an overview of our origination business, business model, and growth strategy. Turning to slide four, Altasource is the manager of the 226-member LendersOne Mortgage Cooperative. As the manager, we offer a suite of solutions designed to help the members improve their profitability and compete against larger and better capitalized mortgage companies. We also provide the members with ongoing educational programs and access to roundtable events and conferences where the members can interact with other like-minded executives to discuss best practices and other issues impacting the industry. We estimate that the LendersOne members collectively originated approximately 16 percent of residential mortgages in 2020, representing approximately $610 billion in origination volume. To give you a better sense of the member scale, if you aggregate all the members' origination production, LendersOne would be the largest residential mortgage lender and roughly the same size as the top three lenders combined. The growth in market share of the LendersOne members is impressive. Based upon the typical LendersOne members branch office business model, the members originate a greater proportion of purchase mortgages than the large nationwide lenders whose production is more heavily weighted to refi. It is anticipated that purchase mortgage originations will become a greater proportion of total originations in the next several years benefiting LendersOne members. In 2020, we grew revenue in our origination business by 46 percent and anticipate growing by approximately 40 to 50 percent in 2021. We believe that the medium to longer-term opportunity for our origination business is massive, with a forecasted year-end 2021 LendersOne membership base representing a serviceable market of $5.7 billion. Slide five illustrates our business model. As the manager of the cooperative, our objective is to leverage the collective buying power of the members to improve their profitability, and generate revenue throughout the source, primarily through four revenue streams. First, we negotiate better pricing for the members with preferred capital market providers and vendors and participate in the enhanced capital market execution and vendor savings. Second, we resell certain products, including flood certificates, e-closings, and verifications at attractive pricing to the members. Third, we establish programs to potentially earn performance-based equity and certain providers that offer products to the members at attractive pricing. Finally, Altasource is a direct provider of solutions, including title insurance and escrow, valuation and fulfillment services, and vendor oversight technology. Slide six sets forth our growth strategy for our origination business. We believe there is a massive opportunity to continue to grow by adding more LendersOne members, increasing the capture rate of existing solutions, launching more solutions, and evolving to a higher margin reseller or direct provider for certain solutions. We believe that our growth strategy creates a very attractive network effect where adding more LendersOne members and evolving certain offerings to a reseller or direct provider affords us greater scale and bargaining power and improves the members' profitability, which in turn attracts more members. As an example of the value we bring to the LendersOne members, last week we signed an agreement with one of the nation's largest retailers to establish a regional pilot program to lease space at its stores to offer loan origination and related services to the retailer's customers through our LendersOne members. We're in active dialogue with our LendersOne members to manage these stores and help them generate mortgage leads and close more loans, which we anticipate would help participating members to further extend their successful branch office business model. In addition to providing what we believe will be attractive mortgage leads to the LendersOne members, we anticipate that this program will enhance customer loyalty for the retailer and generate attractive revenue and earnings for AltaSource. If the 10 to 20-store pilot program is successful, the retailer has indicated that it would like to work with us to expand the program nationwide to as many stores for which we have an appetite. We hope to launch the pilot program by the end of the third quarter. We're excited about the opportunity for our origination business and believe we are just getting started. With our origination business's unique distribution engine and strong growth prospects, we believe this business will be a significant catalyst to create value for shareholders. We look forward to continuing to update you on our progress. Turning to slide seven in our default business. Last week, we entered into an agreement with Aquin to extend the term of our services agreement from August 2025 to August 30, expand the scope of solutions to include the opportunity to provide field services, first and second chance foreclosure auctions, and title services on Aquin's FHA, VA, and USDA loans, and establish a framework to provide foreclosure trustee solutions in additional states. Aquin is an important and strategic customer and we are pleased to enter into this agreement. We also believe that Aquin's recent capital raise, servicing portfolio growth, and anticipated launch of its MSR vehicle will provide AltaSource with significant opportunity to grow as Aquin grows. As expected, first quarter 2021 revenue in our countercyclical default business was 70 percent lower than the first quarter of 2020 and 27 percent lower than last quarter. This was driven by the temporary pandemic-related government measures and other limitations on loan servicers, as well as the transition of field services, title and valuation referrals related to one of AQUIN's MSR investors to that investor's captive vendors in the second half of 2020. According to Black Knight, foreclosure starts and active foreclosure inventory were at record lows in February as extended foreclosure moratoriums continue to suppress default activity. At the same time, average seriously delinquent loans in the first quarter were 4.1% compared to 1.2% in the first quarter of 2020. We continue to be optimistic that the medium to longer term prospects for this business are strong. As we shared with you in our last call and as shown on slide eight, we estimate that revenue in our default business could grow on a stabilized basis to between $243 and $397 million, representing 120 to 260 percent growth compared to the midpoint of our 2021 revenue scenarios. At the low end, the forecast assumes a return to the historically low delinquency rates prior to the pandemic. At the high end, the forecast assumed delinquency rates are at the higher December 2020 levels. We anticipate that the default market will stabilize in 2023 when post-moratorium foreclosure starts convert to a steady state of foreclosure and REO inflows and sales. With short-term demand for our default services constrained due to the pandemic-related foreclosure moratoriums and forbearance plans, and the expectation that additional restrictions on servicers may largely prohibit foreclosures to commence until the end of the year, we are leveraging our default offerings to support the single-family investor market. To support real estate investors, we are developing our signature buyer and signature seller programs to provide a suite of solutions to single-family investors. As you can see on slide nine, the single-family investor market is much larger than the foreclosure sale market with an estimated 1 million investment homes sold per year compared to 140,000 foreclosures that became REO in 2019. In addition, the participants in the single-family market use similar offerings to what we provide in the default space. These include real estate brokerage, online real estate home sales and auctions, title and escrow services, home and rental valuation, and investment home underwriting and acquisition services. We believe Altasource is one of the few one-stop shop providers of these services on a nationwide basis. To address the single-family rental market, we are enhancing our Hubzoo.com and Equator.com websites to better support real estate investors. We are also establishing channel programs intended to drive single-family investors and to our suite of services to support the acquisition, management, and disposition of investment homes. While we are still early in our development of these programs, we believe they could become a significant contributor and provide greater balance to our real estate business over the entire business cycle. Turning to our first quarter, financial performance. As you can see on slide 10, we generated $48.1 million of service revenue and negative $8.5 million of adjusted EBITDA. We performed largely in line with our expectations for the quarter. As discussed, our origination business performed well with revenue growth 68 percent compared to the same quarter last year. The default business was impacted by the continuing pandemic and the loss of referrals from certain portfolios subserviced by Aquin in the second half of 2020. To address the extensions of the foreclosure moratoriums and forbearance plans, we took additional steps designed to reduce our costs in late February. As a result of these and other measures, we anticipate that 2021 cash operating costs, excluding outside fees and services, should be more than $20 million lower than first quarter annualized costs. This equates to an average of more than $7 million in lower costs for the remaining three quarters of 2021. For additional information on our first quarter financial performance, please refer to the press release and Form 10-Q issued earlier this morning. We believe we are positioning Altasource as a more diversified company that should return to growth in 2022. Our origination business is demonstrating significant growth with a massive potential runway in front of it. Our default business continues to be temporarily impacted by the pandemic, but we believe it has tremendous upside from the anticipated pent-up demand once delinquent loans begin to move through the normal default lifecycle. And finally, our expansion into the single-family investor market allows us to leverage our existing suite of default services and should further diversify our revenue and earnings streams. I'll now open up the call for questions. Operator?