Ocwen Financial Corporation NEW

Greetings. Welcome to the Aquin Financial Corporation Preliminary Fourth Quarter Earnings and Business Update conference call. At this time, all participants are in the listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Dico Axarillion, Senior Vice President of Corporate Communications. You may begin.

Good morning. And thank you for joining us for Auckland's preliminary fourth quarter 2020 earnings and business update call. Please note that our preliminary fourth quarter 2020 earnings release and slide presentation are available on our website. Speaking on the call will be Auckland's Chief Executive Officer, Glenn Messina, and Chief Financial Officer, June Campbell. As a reminder, the presentation and our comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are uncertain. Important risks and uncertainties that may cause our results to differ from our forward-looking statements are described in our SEC filings. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. The presentation and our comments contain references to non-GAAP financial measures, such as adjusted pre-tax income and adjusted expenses, among others. We believe these non-GAAP financial measures provide a useful supplement to analysis of our financial condition and an alternate way to view certain aspects of our business that is constructive. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States. The reconciliation of the non-GAAP measures using this presentation to their most directly comparable GAAP measures may be found in the press release and the appendix to the investor presentation available on our website. Finally, this presentation or comments refer to our preliminary fourth quarter financial results. These statements are based on currently available information and reflect our current estimates and assessments. The company has not finished its fourth quarter financial closing procedures. There can be no assurance that actual results will not differ from our current estimates and assessments, including as a result of fourth quarter financial closing procedures, and any such differences could be material. Now, I will turn the call over to Glenn Messina.

Thanks, Deco, and good morning, everyone. Thanks for joining us. Let's get started today on slide three. We're really energized by the great progress we've made across the company. We've executed an incredible business transformation. We're a better balanced and more diversified mortgage originator and servicer. We're stronger, more efficient, and better aligned with future market opportunities. We've concluded our strategic review and are excited to announce an expansion of our strategic alliance with Oaktree Capital with their investment in OFC Holdco Notes. We believe our alliance with Oaktree can enable a level of growth in EPS accretion and potential value creation that we could not achieve on a standalone basis, as well as support for refinancing of our corporate debt. In the fourth quarter, we continued to improve profitability. We delivered record growth in originations, and we continued to reshape and diversify our servicing portfolio. As we look ahead, we believe we are well positioned to capitalize on potential future growth opportunities in multiple market segments, and we're focused on executing five straightforward operating objectives to drive improved value for shareholders. Let's jump to slide six to discuss the outcome of our strategic review process. Our expanded strategic alliance with Oak Tree marks the conclusion to our strategic review process that we announced in May 2020. The objective of our strategic review was to maximize long-term value for Oxfam shareholders. Our review of alternatives, which was overseen by our board and with the support of Barclays and Credit Suisse, was fulsome and robust. Our outreach was aided by our public announcement of the strategic review process, which also resulted in inbound increase by parties not included in our initial outreach. We had discussions with numerous parties and all options were considered. At the end of the day, there were really no actionable change of control or merger opportunities that emerged from these discussions. In the absence of a change of control transaction, we believe we need to accelerate our originations in service and growth and address the upcoming corporate debt maturities to maximize our value as a standalone company. We concluded through our strategic review that our ability to increase the leverage of the total company using the assets of the operating company was limited by a number of factors, including proposed regulatory requirements that may increase capital and liquidity requirements for non-bank mortgage companies. So to address our growth and refinancing objectives with these constraints, we focused our structured financing solutions that would provide incremental capital to accelerate our growth and position the company to successfully refinance our upcoming corporate debt maturities without encumbering the assets necessarily of PHH, our operating company. We're excited to announce that we've executed definitive agreements with Oaktree for $250 million in incremental capital through hold code notes issued by Aquin Financial Corporation. This is our holding company, and this incremental capital is in addition to our joint venture with Oaktree on MAV. When combined with MAV, we expect the over $460 million in capital provided by Oaktree can enable us to potentially increase our earnings per share by 65% or more once the proceeds are fully invested. We believe the Holdco notes also support our corporate debt refinancing on more favorable terms while increasing the capacity for secured financing and share repurchases. For these reasons, the Board found the Oaktree offer to be the most compelling opportunity to enable a level of growth, EPS accretion, and potential long-term value creation that we could not achieve on a standalone basis. We believe the Oak Tree investment enhances our ability to compete and prosper, as well as demonstrates their confidence in and commitment to Auckland's long-term success. Now, let's turn to slide seven for some of the details on MAZ and the Holdco notes. You know, starting with the Holdco notes, these are structured with a collateral package limited to a second lien on the assets of OFC, the holding company. There is no lien on the PHH assets or guarantees from PHH. This is a substantially reduced collateral coverage and more deeply subordinated position in our capital structure versus our existing high yield notes. The limited collateral package and deep subordination enables us to treat the proceeds from the holdco notes that gets contributed to PHH or operating company as equity. And we expect this will increase our ability to leverage the assets of PHH with first lien debt and secured financing. You know this deeply subordinated position in our capital structure relating to the Holocaust Notes does translate into pricing that's close to equity. The Oak Tree Notes have a face value of $285 million with a $35 million original issue discount for net proceeds of $250 million. The coupon is 12% plus about 2% for the effective annual cost of the OID. In addition, Oaktree will receive warrants for 12% of the fully diluted shares of AQUA. In terms of use of proceeds, we intend to use $100 million of the proceeds to pay down and support the refinancing of our existing corporate debt in a concurrent refinancing transaction. We expect less restrictive covenants, eliminating amortization, and relative to existing corporate debt, extending the maturity with an expected tenor of six years on the hold code notes. Concurrent with the refinancing, we'll pay off our existing corporate debt per their respective terms. The remaining $150 million in proceeds from the Holdco notes will be used to support our on-book growth objectives through MSR purchases and funding a portion of the math investment. We do expect the incremental capital in the operating company will allow us to improve the terms of our existing MSR financing, which can create up to about $75 million in additional capital from our existing MSRs. The proceeds from Oak Tree will come in two tranches. The first tranche is $175 million, and that will come in concurrently with the closing of the corporate debt refinancing. The remaining $75 million will come in concurrent with the closing of MAV. Moving on to MAV, as we announced in December, we formed a partnership joint venture with Oak Tree Capital to launch an MSR asset vehicle. This vehicle will purchase MSRs. Oaktree will own 85% and Auckland will own 15%. MAV expects to leverage up to $250 million in capital that will be contributed by Oaktree and Auckland, respectively, based on our relative shares to purchase MSRs. And this will be leveraged up roughly one for one with secured MSR financing. So that gives us the capacity for up to about $60 billion in MSR UPB. PHH will be the sole provider of origination, subservicing, and recaptured administrative services to MAV. And AQUIN will also earn MSR investment returns on its capital contribution and from profit sharing on returns in MAV above 12%. MAV is expected to close in the first half of 2021, subject to GSE and regulatory approvals. In terms of benefits, MAB supports our servicing and subservicing growth objectives on a capital efficient basis and will help generate increased cost efficiency through increased origination and servicing scale. Moving on to slide 8, in terms of the financial impact of the oak tree investment in Aquin, We estimate that a combined basis to hold code notes and math can contribute up to $78 million in annualized pre-tax income from full deployment of capital provided by these two structures. We estimate full deployment of the proceeds can generate roughly $5 per share in incremental earnings on a fully diluted basis. This translates to over a 65% increase above our potential baseline EPS range which assumes an after-tax ROE range of roughly 10% to 15% on about $414 million of equity. Using a PE multiple range of some of our peers of roughly 4 to 6 times forward earnings, the potential incremental value creation is roughly $20 to $30 per share. This is a 7 to 10 times multiple of the potential book value per share dilution. Assuming the warrants are fully issued, and the corresponding increase to our equity from the proceeds related to issuing the warrants. The incremental investment capital will allow us to further expand our rich nations activities and expand our participation in the bulk purchase market. We expect to source roughly up to $200 billion in incremental total volume over the next couple of years. And again, that's estimated to source up to $200 billion. incremental volume over the next two years. The total growth in volume will allow us to grow our total subservicing portfolio to roughly $300 billion by the end of 2022, assuming the NRC subservicing contract is not renewed. So again, strong growth in the servicing portfolio resulting from the originations. We believe it's a great time to invest in MSRs, pre-tax cash IRRs, and our MSRs generated in December were about 12% before MSR financing. That translates to roughly 18% after MSR secured financing. In addition, we'll continue to opportunistically evaluate M&A transactions to expand our rich nations and servicing capabilities, which might provide enhanced returns versus MSR investments. Yeah, these estimates are based on the judgment of management and based on our current assumptions, which may be subject to change based on market and industry conditions, amongst other things. You know, look, the bottom line here is we're really excited about our alliance with Oaktree and the opportunity it provides to enable a level of growth and EPS accretion and potential value creation that we could not achieve on a standalone basis. Moving on to slide nine, maybe a little bit about the fourth quarter. So look, during 2020, we demonstrated exponential total volume growth, total cost improvement, and built a scalable and efficient platform to support our future growth. Adjusted pre-tax profitability was up roughly 15% in the fourth quarter over the third quarter, despite declining origination margins. Annualized adjusted pre-tax profitability has improved over $380 million. over the second quarter 2018 baseline for AQUA and PHH combined. Our multi-channel origination platform continued to deliver really strong results. Flow origination volume in the fourth quarter was up 49% over the third quarter and up over seven times as compared to 2019. So again, just really great performance by the originations team. And as we talked about earlier, we're focused on accelerating our growth trajectory in 2021. You know, we are focused on driving Efficiency in our operating expenses, and as a result of that efficiency and our continuous cost improvement, operating expenses are down 44% over the second quarter 2018 baseline for Aqua and PHH combined. That's over a $400 million cost reduction. So again, just great performance by the team in really rethinking and reimagining our business infrastructure. You know, we're, we're disappointed, uh, that settlement discussions with the CFPB did not resolve this matter. Uh, and since, especially since we've resolved all state regulatory actions filed against Aquan in 2017, we engaged with the Bureau in good faith, uh, throughout the course of mediation and numerous related discussions and took all actions in an attempt to reach a fair and reasonable resolution. Uh, we increased our legal regulatory accrual related to the CFPB matter by $13 million in the fourth quarter. resulting from our efforts to resolve the matter in mediation. Yet we remain steadfast in our belief that the CFPB's claims regarding Aquin's past servicing practice are unsubstantiated and the Bureau settlement demands do not reflect the merits of this case. While we remain committed to attempting to resolve the matter prior to trial, our pending motion for summary judgment, which was filed on June 5th of 2020, supports our position on this matter, and we expect to continue to vigorously defend ourselves going forward. Look, it was a great quarter, fourth quarter, great year in 2020, and I could not be prouder of the team of what they accomplished. Moving to slide 10, maybe a little bit about the Originations platform. We delivered a record total volume of $30 billion in the fourth quarter. This translates to roughly an annualized run rate of about $60 billion from our flow channels and about $60 billion analyzed from bulk. Total volume for 2020 was $59 billion versus $26 billion last year, so we've doubled total volume. Full-year flow and co-issue originations are up eight times over last year. Full-year bulk and subservicing ads are up over 48% as compared to last year. Our correspondent and flow celebrates increased about three-fold since the fourth quarter of 2019. All of our channels delivered strong double-digit growth quarter over quarter. As I mentioned before, cash yields and MSRs continue to be very strong, and our portfolio replenishment was exceptional. In addition, in the fourth quarter, we were awarded multiple subservicing contracts with projected volume of $16 to $24 billion that we expect will board in the first and second quarter. Margins, as well, continued to contract in the fourth quarter. We had expected that. The average margins fell to about 56 basis points versus our expectation of 77 basis points for Q4. This was really solely due to higher than expected third-party volume. Margin compression by each channel was actually slightly less than expected. Again, here, great performance by our rich nations and capital markets teams, and I believe we've got more room to grow. We'll talk about that in a minute. Turning to slide 11, our servicing platform continued to deliver very strong performance in the fourth quarter. Our servicing leadership team is doing a great job of driving continued improvement in efficiency and effectiveness and helping customers navigate through the crisis. Our call center continued to outperform the MBA reported industry averages. Our key claims metrics also continued to perform with nearly 100% effectiveness. We continue to invest in technology to lower unit costs, improve performance for investors, and enhance the customer experience. Despite almost all of our people working remotely, we've continued our unparalleled track record of helping homeowners in need. In 2020, we provided forbearance relief for over 180,000 consumers, and we completed about 40 virtual bar outreach events to reach consumers potentially impacted by the pandemic. The strength of our rich nations has allowed us to grow our servicing portfolio slightly in the fourth quarter, and we achieved roughly a 50-50 mix of own servicing and sub-servicing. Again, here I'm really proud of how our servicing team has transformed our operation. All our hard work over the last two years really positions us well for profitable growth, leveraging a scalable and efficient platform for 2021. Turning to slide 12. In 2021, looking ahead at the market, we expect the total rich nations will be down roughly about 17% with much of the decline in the second half of the year. BlackSide is reporting that there's still about 16 to 17 million borrowers who are eligible for refinancing, which should continue to drive the refi market in the near term. As well, the millennial generation is driving significant growth in the number of first-time potential homebuyers. which should long-term also bode well for the purchase market. Our reverse origination platform is positioned to support the financial needs of our growing senior population by tapping into an estimated $7.8 trillion of untapped home equity. Our special servicing expertise and track record of creating non-foreclosure outcomes for consumers positions us to support the roughly 1.8 million homeowners who are still on forbearance who may need loss mitigation assistance. We estimate that roughly 85% of these borrowers are delinquent, and we further estimate that about 25% will need loss mitigation assistance. We expect the increase in GDMA workouts as foreclosure alternatives will drive increased EBO, early buyout gain opportunities, in GDMA servicing. And the current low interest rate environment can create opportunities to drive increased realization of gains from executing call rates. As most of you know, as rates rise, total industry volume will decline. We also expect margins will contract, and we've seen some of that this year. However, rising rates can increase the value of our own MSRs by extending duration, and MSR amortization will slow as prepayments decrease. The increase in MSR values as rates rise will possibly impact book value per share. Turning to slide 13, our focus for 2021 will be on executing five key business initiatives that we believe will help us capitalize on the opportunities that are available in the market ahead. Those are accelerated growth, strengthen our recapture performance, improve our cost leadership position, maintain high-quality operational execution, and expand servicing revenue opportunities. From a regulatory perspective, we are monitoring and will continue to evaluate the impact that the Biden administration's key agenda items may have on our industry. We'll also closely monitor, be monitoring statements from the CFPB regarding any planned priorities or areas of focus. The president has already signed an executive order calling for various federal agencies to extend foreclosure and eviction moratoria. And the administration's enhanced stimulus plans could include additional protections with respect to forbearance and foreclosure and eviction moratoria. Any changes at the federal level will obviously be uniform across all competitors in the industry. And thus far, Aquedent alone, as well as the industry, has proven to be adaptable in a dynamic regulatory environment. We expect the successful execution of our Key initiatives will allow us to deliver positive gap earnings in 2021 with low double-digit to mid-teen after-tax ROEs, again by mid-2021, assuming no adverse changes in the market, industry, or business conditions, or legal and regulatory matters. And June will take us through our roadmap for 2021 later. And maybe I'd like to share a little bit more about each of these initiatives for 2021 on the next few pages. You know, turning to slide 14, in 2021, our goal is to achieve over $100 billion in volume with a 40-60 mix of own servicing and subservicing, respectively. Our fourth quarter run rate kind of puts us on track for those levels. You know, we focused on several actions to accelerate our growth trajectory by leveraging our multi-channel platform. We're targeting to grow our seller base again, over $450 in 2021 to support our growth in correspondent and flow volumes. as well as performing and special subservicing opportunities. We believe our broad portfolio of services, including subservicing, specialty servicing, NSR purchase through multiple delivery methods, provides a compelling value proposition. We're also focused on expanding, you know, our product reach, so expanding our share in the Ginnie Mae market through Correspondent and the Ginnie Mae co-issue market. In Correspondent, we're also working to introduce jumbo and non-QM products, as well as expanding our service to include best efforts and non-delegated delivery methods. You know, in subservicing, we're expanding our small, balanced commercial loan business. That's beginning to grow nicely for us. And finally, you know, MAV will allow us to expand our participation in the bulk market significantly, which will help us create synthetic subservicing. You know, and finally, as I mentioned earlier, we continue to evaluate opportunities to enter higher margin channels based on market conditions. You know, turning to slide 15, we continue to target achieving at least a 30% recapture rate for a recapture platform. And we believe our recapture performance is only limited by our operating capacity to address available opportunities. And our recapture team has consistently, over the last four or five quarters, grown our closings quarter over quarter, and has marched up the recapture rate quite nicely. But we've still got more room to grow. So we expect to increase staffing levels by over 40% through the course of 2021. We're continuing to hire and train new team players. in every position and intend to do so throughout the year. We are focused on process and technology as well. We're focused on helping new team players improve their productivity as they mature in their roles. We're also driving continuous process improvement with our process improvement teams, leveraging our global workforce. And we're focused on implementing new technology to support expanding our capacity and cross the entire Low Duration Nation life cycle. Moving to slide 16, we remain focused on driving productivity to improve our cost leadership position while maintaining high-quality operational execution. We're targeting to reduce our servicing operating costs by roughly two basis points of UPB this year and reducing corporate overhead expenses by roughly one basis point of UPB. We're executing over 60 technology-enabled projects across the business to drive productivity, cost reduction, and improve customer experience and support growth. We'll continue to focus on high quality execution in our operations relative to competitive entry benchmarks to further improve our customer experience and create value for investors and clients. And as we did in 2020, we stand ready to support consumers in need of forbearance relief and loss mitigation assistance as they come off forbearance. You know, on slide 17, you know, finally we're focused here on several actions aimed to expand our servicing revenue opportunities. We're preparing for a surge in loss mitigation related to expiring GDMA forbearance plans. We expect this will also create a potential surge in early buyout and modification-related redelivery gains. Here we're tracking roughly $300 million in RMBS call rate opportunities. We expect roughly $125 million will be eligible to call in 2021, and we'll continue to evaluate the variables that impact eligibility and economics of executing these calls throughout the year. And finally, we continue to evaluate opportunities to expand our capabilities in both forward and reverse servicing. And now I'll turn it over to June to go through our financial performance for the quarter.