Altisource Portfolio Solutions S.A.

Ladies and gentlemen, thank you for standing by and welcome to the Altisource Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Michelle Esterman, Chief Financial Officer. Thank you. Please go ahead.

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. Please review the forward-looking statements section in the company's earnings release and quarterly slides as well as the risk factors contained in our 2020 Form 10-K and second quarter 2021 10-Q which describe factors that may lead to different results. We undertake no obligation to update these statements, financial scenarios, and projections previously provided or provided here as a result of a change in circumstances, 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 will now turn the call over to Bill.

Thanks, 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 and provide an update on our investment and point list. While the last year and a half presented a challenging operating environment for AltaSource, I am very excited about the future for our origination and default businesses. Beginning with our origination business in slide 3, I'm pleased with the second quarter performance and more importantly with our long-term prospects. This business generated $14.5 million in revenue in the second quarter, representing 16% growth compared to the same period in 2020, outpacing the estimated 13% growth in the overall origination market. More importantly, we believe our attractive origination business model should support rapid growth. Slides four through six highlight our business model and growth opportunities. Beginning with slide four, Altasource is the manager of the 241-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 data and market intelligence to drive better business decisions and improve profitability. We estimate that the LendersOne members collectively originated approximately 15% of residential mortgages in 2020. This is roughly the same volume of the top three lenders combined. We believe the LendersOne members are also well positioned to gain market share in a rising interest rate environment as their typical branch office model is more purchase as opposed to refi oriented. As an example of the value we bring to the LendersOne members, in the second quarter, one of the nation's largest retailers selected LendersOne over other mortgage lenders to establish store and store branch locations as part of a pilot program. If the program is successful, we anticipate the national rollout will drive attractive mortgage leads to the LendersOne members, enhance customer loyalty for the retailer, and generate attractive revenue and earnings for AltaSource. Slide 5 illustrates the LendersOne business model. As the manager of the LendersOne cooperative, our objective is to leverage the collective buying power of the members to improve their profitability and generate revenue for AltaSource primarily through four revenue streams. First, we negotiate better pricing for the members with preferred capital market providers and vendors and participate in enhanced capital market execution and vendor savings. Second, we resell certain products, including flood certifications, e-closings, and verifications, at attractive pricing to the members, generating margins for us as the manager. Third, we establish programs where we potentially earn performance-based equity in certain providers that offer products to the members at attractive pricing. Finally, we are a direct provider of solutions including title insurance and escrow, valuation, loan fulfillment, and vendor oversight technology. Slide 6 sets forth a growth strategy for our origination business. We believe there is a compounding growth opportunity by adding more LendersOne members, launching new solutions, increasing the capture rate of existing solutions, and evolving to a higher margin reseller or direct provider for certain solutions. The growth opportunity is fueled by the network effect of the LendersOne Cooperative, where more members provide greater buying power and support new product launches. Greater buying power in new products improve member profitability, and stronger member profitability increases product adoption and attracts more members. As part of our growth strategy, this quarter we are launching a beta version of our LendersOne loan automation technology, which we refer to as Lola. Lola is an internally developed technology solution designed to make it easier for LendersOne members to order and receive our solutions through a single point of entry and automate loan manufacturing processes to improve members' operational efficiency. 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, mission-critical solutions, and strong growth prospects, We believe this business will be a significant catalyst to create value for shareholders. Notably, there are several companies that we believe have similar business models which recently executed capital market transactions at attractive valuations. On slide seven, we include a comparison of three of these companies to our origination business. As you can see, technology-enabled, solutions-based companies with a strong network effect and growth are valued very highly by the market. With the attractive market comps and the progress we are making with the origination business, we are evaluating ways to enhance shareholder value. These options may include a potential divesture, joint venture, third-party investment in, or other strategic transaction, as well as retaining and investing in the business. There can be no assurance that this exploration will result in any transaction or other actions by us, and we don't intend to provide updates unless and until we determine that further disclosure is appropriate or required. Turning to slide eight in our default business. The default market in our business have been severely impacted by the pandemic. However, we recently gained additional clarity on the timing of the recovery of the default market. The federal government extended its foreclosure and eviction moratoriums by one month through July 2021 and indicated that this will be the last extension. The CFPB also finalized its rules on temporary loss mitigation measures, which essentially prohibits foreclosure initiations until January 1, 2022, other than a few exceptions, including those loans that were 120 days or more delinquent prior to the pandemic. Based on this clarity, we believe this business will grow in 2022 and stabilize during 2023. As shown on slide 9, We estimate that our default business revenue could grow on a stabilized basis to between $230 and $352 million. At the low end, we assume a return to the historically low delinquency rates immediately prior to the pandemic. At the high end, we assume delinquency rates are at the higher second quarter 2021 levels. Turning to slide 10, we are pleased that we recently signed an agreement with Aquin, which extended the terms of certain of our services agreements from August 2025 to August 2030 and expanded the scope of solutions to include, among others, the opportunity for us to provide first and second chance foreclosure auctions on FHA loans and field services on Aquin's government loans. During the quarter, Aquin transitioned more than 1,900 of its FHA first chance foreclosure auction inventory to us and increased our percentage of field service referrals on its government loans. We believe this agreement, along with Auckland's anticipated servicing portfolio growth, provide AlphaSource with a significant opportunity to grow. Leveraging the capabilities we have in the default business, we are re-energizing our solutions for the single-family rental market. This is an attractive business that complements our counter-cyclical default business. As you can see on slide 11, the single-family investor market is more than seven times larger than the REO sale market with an estimated 1 million investment homes sold per year compared to 140,000 foreclosures that became REO in 2019. We have experience in this market having provided these services to front yard residential for many years. While large investors have entered the space in the last decade, mom and pop investors still make up the lion's share of this market. To meet the needs of small and midsize real estate investors, We developed a signature buyer and a signature seller program that provide a full suite of solutions to support the acquisition, management, and sale of homes. We are encouraged by the early progress of these programs. Turning to Point-A-List, Point-A-List is an AI-driven customer journey management SaaS platform that connects the dots between customer experience and business outcomes, helping companies to improve retention and reduce costs. In 2019, Altasource created Pointless as a separate legal entity and contributed the Pointless business to it. Pointless has been making great progress. During 2021, Pointless won several large contracts with household names and has increased its annual recurring revenue by more than three times since the end of 2020. As Pointless continues to grow, it plans to look to raise third-party growth capital at what we believe could be an attractive valuation. They should also provide greater visibility into the value of our investment in PointList. We believe we are positioning Altasource as a more diversified company that should return to growth in 2022. While the last year and a half has been difficult, we're excited about our prospects in our origination and default businesses. I'll now open up the call for questions. Operator?