Altisource Portfolio Solutions S.A.

Ladies and gentlemen, thank you for standing by and welcome to the Altisource 4th 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 then 0. I would now like to hand the conference over to your speaker, Michelle Esterman, Chief Financial Officer. Please go ahead.

Thank you, Operator. We first want to remind you that the earnings release form 10-K 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 continuing COVID-19 pandemic makes it extremely difficult to predict the future state of the economy and its potential impact on Althysource. 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 2021 Form 10-K 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 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'll now turn the call over to Bill.

Thanks, Michelle. Good morning and thank you for joining today's call. I'll begin on slide three. Altasource demonstrated resiliency during 2021. A year defined by challenges from the pandemic and related borrower relief programs that significantly impacted our revenue and adjusted earnings. We strengthened our balance sheet with a fourth quarter sale of PointList. We ended 2021 with $98.1 million in cash and $149.1 million of net debt, representing a 68% increase in cash and a 21% reduction in net debt compared to 2020. We believe we are poised to return to revenue growth in 2022 with quarterly year-over-year revenue forecasted to grow over the same period in 2021 beginning in the third quarter. The growth reflects the anticipated tailwinds in our default business from the recent termination of the temporary pandemic-related borrower relief programs and launch of new solutions, customer wins, and greater product adoption in our origination business. With the expected revenue growth, and benefit of our prior cost reduction initiatives, we anticipate we'll generate positive adjusted EBITDA for the second half of 2022. This morning, I will briefly discuss our fourth quarter results and our core origination and default businesses in greater detail. Turning to slide four, our fourth quarter financial performance was largely in line with our expectations with revenue impacted by pandemic-related temporary borrower loss mitigation measures and seasonality. Fourth quarter net income of $70.6 million benefited from the gain on sale of Pointalyst. On December 1st, we completed the sale of our equity interest in Pointalyst and received approximately $102 million in cash, significantly strengthening our balance sheet and generating an $80 million post-tax gain. We used $20 million of the proceeds to repay the outstanding balance on our revolver. Assuming no adjustments, we expect to receive an additional $3.8 million in 2022, with a majority to be received in December. This sale was a big win for Altasource, and we believe demonstrates that we have developed an attractive collection of valuable businesses. Turning to slide five and our strategic priorities for 2022, we have two primary areas of focus. First, continuing to build out and grow our origination business through new solutions, customer wins, and greater product adoption, and second, growing our default business, leveraging our history as a leading provider of solutions that support loan servicers and the tailwinds from the expiration of the foreclosure moratoriums and temporary loss mitigation measures. Slide six provides additional information on how we intend to continue to develop and grow our origination business. The mission for our origination business is to help small to mid-sized banks, credit unions and independent mortgage bankers that are members of the LendersOne Cooperative improve their profitability and better compete. We believe this mission strongly resonates with our LendersOne members and prospects that are looking for a competitive edge, particularly in this challenging origination market. In this vein, in the fourth quarter, we grew LendersOne membership by 11 members to 251 members and launched our tri-merge credit report offering and certain verification, fraud, and other solutions that are typically ordered during the loan manufacturing process. We also launched the LendersOne loan automation technology, which we refer to as Lola, following a successful beta launch. Lola makes it easier for LendersOne members to order and receive our solutions through a single platform and automates loan manufacturing processes to improve their operational efficiency. The launch of these offerings and increased adoption of our existing solutions, along with the growth and planned for growth of the number of LendersOne members, should support full-year double-digit revenue growth in the origination business, despite the MBA's forecast for a 34% decline in origination volume. We anticipate the year-over-year quarterly growth in the origination business to begin with the third quarter. Keep in mind that the LendersOne members are well-positioned to gain market share in a rising interest rate environment, as their typical branch office model favors purchase as opposed to refinance mortgage originations, and the purchase market is forecasted to grow by 8% over last year. Turning to Slide 7 and our default business. Since early 2000, this business has been severely impacted by the pandemic, as temporary foreclosure moratoriums and loss mitigation measures significantly reduced referrals to AltaSource despite higher delinquency rates. Recently, however, we believe that the default market is entering the early innings of a recovery. The federal government's pandemic-related foreclosure moratorium expired at the end of July, and the CFPB's temporary loss mitigation measures expired at the end of last year. As a result, servicers have begun to restart and initiate new foreclosures. We are beginning to see some of the leading indicators that support our growth expectations and are experiencing an increase in referrals in several of our default businesses. HUBZU referrals in the fourth quarter were 158% higher than the same quarter in 2020 and ending HUBZU inventory of over 6,300 homes marks our third consecutive quarter of inventory growth. For the first two months of this year, we have also experienced a significant increase in trustee, pre-foreclosure title, and HUBZoo referrals, with these businesses growing referrals by 57%, 22%, and 217%, respectively, over the same two months last year. The growth in HUBZoo referrals was largely driven by higher foreclosure auction referrals, a portion of which will result in future revenue. While it's difficult to predict how servicers are going to respond to the expiration of the temporary governmental measures and how home price appreciation may impact the default market, we expect these positive trends to continue as the year progresses. We also have insight into which of our solutions should begin to grow earlier in the recovery process and which should take longer. Slides 8 and 9 provide you with an illustration of the way we believe our default revenue will recover as the market returns to what we believe will be historical norms. We anticipate that the first services to return will be title and valuation work on foreclosure initiations. We expect this will be followed by foreclosure auction referrals. Homes that don't resolve prior to the foreclosure auction or sell at the foreclosure auction usually become REO referrals. On the REO referrals, we typically first generate field services revenue and at the home sale generate title insurance, real estate brokerage, and auction fees. Because REO inventory was depleted during the pandemic and the sale of REO is the last step in the default process, we anticipate that it will take time for our REO inventory levels to return to a normal operating level. We currently estimate that we'll be in a normal post-pandemic operating environment by the middle of 2023. A driving factor of revenue in our default business is delinquency levels. December 2021 90-plus day delinquency rates were 2%, a 59% increase compared to the pre-pandemic delinquency rate. As shown on slide 10, we estimate that our default business revenue could grow on a stabilized basis to between $214 and $237 million, holding all other assumptions constant. 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 December 2021 levels. Based upon our anticipated return to revenue growth in both our origination and default businesses, we forecast Altasource will begin to generate positive adjusted EBITDA for the second half of 2022 on a significantly reduced cost structure. For the full year of 2021, cash costs excluding outside fees and services, which are typically incurred only if revenue is generated, were $49.3 million lower than 2020. Before I conclude, I'd like to provide you with an update on the Board's process to evaluate our options to enhance shareholder value with respect to our origination business that we announced on July 29, 2021. We recently concluded this process and after exploring a range of alternatives for the origination business, we determined that it is in the best interests of the company and our shareholders to retain and further invest in the business. We have an exciting strategic plan and believe the origination businesses unique distribution engine and strong growth prospects will be a significant catalyst to create value for shareholders. The last couple of years have not been easy, but I am pleased that we have strengthened our balance sheet and are forecasting a return to revenue and adjusted EBITDA growth. In addition to market tailwinds in our default business, we are building an exciting and innovative origination business that we believe will create substantial value for our shareholders and customers. I'd like to thank and recognize Altasource's board, leadership team, and employees who supported the company as we navigated through the pandemic while continuing to provide high-quality services to our customers. I'll now open up the call for questions. Operator?