Altisource Portfolio Solutions S.A.

Good day and thank you for standing by. Welcome to the Altisource 3rd Quarter 2021 Earnings Call. At this time, all participants are in 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Michelle Esterman, Chief Financial Officer. 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 HealthySource. 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 2021 10-Qs, 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 herein as a result of 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'll now turn the call over to Bill.

Thanks, Michelle. Good morning, and thank you for joining today's call. Turning to slide three. This morning I will discuss the four reasons we believe AltaSource is well positioned for 2022 and beyond. First, we believe that our default offerings are poised for significant revenue and earnings growth as we return to a more normal post-pandemic operating environment. Second, we are executing on our strategic plan in our originations business and believe this will also be a significant driver for growth. Third, we anticipate that we will generate positive cash flow in the second half of 2022 as we return to revenue growth on a significantly reduced cost structure. Fourth, the anticipated sale of our equity interest in PointList significantly strengthens our balance sheet by adding an estimated $100 million of cash at closing. Beginning with our default business in slide four, our business has been severely impacted by the pandemic over the last year and a half, as foreclosure moratoriums and forbearance plans significantly reduced referrals to AltaSource. However, we believe the end is in sight as we return to a more normal post-pandemic operating environment. The federal government's foreclosure moratorium expired at the end of July, and the CFPB's rules requiring temporary loss mitigation measures are scheduled to end on January 1, 2022. The CFPB's rules essentially prohibit foreclosure initiations until January 1, other than a few exceptions, including those loans that were 120 or more days delinquent prior to the pandemic. We are beginning to see some of the leading indicators that support our growth expectations. According to Black Knight, third quarter foreclosure initiations were 28% higher than the second quarter, but still remain more than 85 percent lower than the pre-pandemic fourth quarter of 2019. Further, third quarter HUBZU referrals were 107 percent higher than the same quarter in 2020, and ending HUBZU inventory of close to 6,200 homes marks our second consecutive quarter of inventory growth. These increases were partially offset by temporary foreclosure holds on homes impacted by Hurricane Ida. We expect these positive trends to continue and accelerate in 2022 after the scheduled expiration of the temporary CFPB loss mitigation rules and the Hurricane Ida related foreclosure holds. On a stabilized basis, revenue in our default business depends on delinquency levels. As shown on slide five, we estimate that our default business revenue could grow on a stabilized basis to between 227 and 296 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 third quarter 2021 delinquency levels. To balance the counter cyclical nature of our default business, we continue to refresh our solutions for the single family rental market as illustrated on slide six. The single family investor market is attractive to us because we can leverage many of our existing suite of solutions and the market is more than seven times larger than the REO sales market, with an estimated 1 million investment homes sold per year compared to 140,000 foreclosures that became REO in 2019. During the quarter, we updated our Equator.com website and continued to develop our signature buyer and signature seller programs to meet the needs of small and midsize real estate investors that make up the lion's share of this market. While still early, we are encouraged by the progress of these programs. Turning to slide seven in our origination business. The origination business continues to perform well as we execute on our mission to help banks, credit unions, and independent mortgage bankers improve their profitability. During the quarter, we are approved by the three national credit repositories to act as a credit reporting agency, and we executed reseller agreements with five providers of verification, fraud, and other solutions that are typically ordered during the loan manufacturing process. We plan to launch our tri-merge credit offering along with these other reseller solutions in the fourth quarter. The launch of these offerings and increased adoption of our existing solutions, along with a planned growth of the number of LendersOne members, should support 40 to 50 percent revenue growth in the origination business, despite the MBA's forecast for a 33 percent decline in origination volume in 2022. We believe the LendersOne members are 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. We've included on slides eight through ten a summary of the origination business. Slide eight provides a description of LendersOne, whose members collectively originate approximately 16 percent of all U.S. residential mortgages. Slide nine describes the LendersOne business model, and the manner in which we deliver services to the members. Slide 10 illustrates the compounding growth opportunity driven by the network effect and improving unit economics. As I shared with you last quarter, we are evaluating ways to enhance shareholder value with respect to our origination business. These options may include a potential divestiture, 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. We don't intend to provide updates unless and until we determine that further disclosure is appropriate or required. Based upon our anticipated return to revenue growth in 2022, we forecast Altasource will generate positive cash flow in the second half of the year on a significantly reduced cost structure. During the third quarter, we reduced our cash expenses excluding outside fees and services, which vary with revenue, by 6 percent compared to the second quarter of 2021. Cash costs, excluding outside fees and services, for the nine months ended September 30, were $40.7 million, or 26 percent lower than the same period in 2020. We continue to take steps to lower our costs by reducing our facilities footprint and investing in automation. Finally, turning to slide 11 in Point-to-List, our customer journey management SaaS platform. Last month, we announced that shareholders of Point-to-List entered into a definitive agreement to sell Point-to-List for $150 million. Based on Altasource's 69% fully diluted ownership interest, we estimate that we will receive approximately $100 million in cash at closing, subject to a working capital adjustment. We will also receive an additional $3.7 million in cash following the one-year anniversary of closing, assuming no indemnification claims. We anticipate the sale of Pointless will close before the end of the year and estimate that it will generate a pre- and post-tax gain of $107 million before any potential reduction of goodwill. We believe this transaction demonstrates that Altasource has a collection of valuable businesses that may not be fully appreciated by the capital markets. Altasource intends to use the estimated $100 million of cash proceeds at closing for general corporate purposes. I'd like to congratulate and thank the Pointless team and wish them the best in the next phase of Pointless evolution. We are excited about the opportunities in front of us. We believe we are well positioned to grow our origination and default businesses in 2022 and generate positive cash flow in the second half of the year with higher revenue on a significantly lower cost base. I'll now open up the call for questions. Operator?