ASPS - Altisource

[rayfinkle]

-resell loans to resi

-ocwen to service

-list on hubzu where not rented

[netnet]

Not a peep on ASPS?

 

To me it looks as if the worst case is the Ocwen business goes away and we would then be sitting at a ~21 PE. the EBIT/EV number is scary though.  So from here I would estimate that the worst is a 50% haircut, with unknown probability.  I do need to dig back in the debt to see where a) the public debt is trading and b) the terms and due dates on the debt.

 

The upside, well that could be pretty good.  if the OCWEN's sold MSR's continue with ASPS in some fashion and the multiple recovers, then well it's a double or a triple. The worry is the debt.

 

Thoughts?

[ItsAValueTrap]

Here’s a quick and dirty calculation for Altisource’s current P/E ratio.  In the last two quarters, earnings plus amortization of acquisition-related intangible assets (net of tax) was $2.63 for Q2 and $2.18 for Q3.  The average EPS (minus amortization of intangibles) of the past 2 quarters is $2.41.  Subtract $0.60 from that to account for the discontinuation of the insurance brokerage businesses.  Adjusted EPS is now $1.81/quarter or $7.24 annualized.  Altisource’s current share price is $29.44.  Adjusted P/E is 4.06.

 

Altisource's default-related services will eventually start declining naturally unless Ocwen is able to replenish their subprime MSRs.  Still... this looks cheap to me.  The NY DFS did not regulate either company out of business (?yet?) so the apocalyptic scenario did not play out.

 

Not a peep on ASPS?

 

To me it looks as if the worst case is the Ocwen business goes away and we would then be sitting at a ~21 PE. the EBIT/EV number is scary though.  So from here I would estimate that the worst is a 50% haircut, with unknown probability.  I do need to dig back in the debt to see where a) the public debt is trading and b) the terms and due dates on the debt.

 

The upside, well that could be pretty good.  if the OCWEN's sold MSR's continue with ASPS in some fashion and the multiple recovers, then well it's a double or a triple. The worry is the debt.

 

Thoughts?

 

The Ocwen business can't go away because they signed a contract that is due for renewal a while from now.  The rates on some of Altisource's services could get adjusted downwards depending on whether or not the NY DFS decides to be hard asses.

[Fat Pitch]

Here’s a quick and dirty calculation for Altisource’s current P/E ratio.  In the last two quarters, earnings plus amortization of acquisition-related intangible assets (net of tax) was $2.63 for Q2 and $2.18 for Q3.  The average EPS (minus amortization of intangibles) of the past 2 quarters is $2.41.  Subtract $0.60 from that to account for the discontinuation of the insurance brokerage businesses.  Adjusted EPS is now $1.81/quarter or $7.24 annualized.  Altisource’s current share price is $29.44.  Adjusted P/E is 4.06.

 

Altisource's default-related services will eventually start declining naturally unless Ocwen is able to replenish their subprime MSRs.  Still... this looks cheap to me.  The NY DFS did not regulate either company out of business (?yet?) so the apocalyptic scenario did not play out.

 

Not a peep on ASPS?

 

To me it looks as if the worst case is the Ocwen business goes away and we would then be sitting at a ~21 PE. the EBIT/EV number is scary though.  So from here I would estimate that the worst is a 50% haircut, with unknown probability.  I do need to dig back in the debt to see where a) the public debt is trading and b) the terms and due dates on the debt.

 

The upside, well that could be pretty good.  if the OCWEN's sold MSR's continue with ASPS in some fashion and the multiple recovers, then well it's a double or a triple. The worry is the debt.

 

Thoughts?

 

The Ocwen business can't go away because they signed a contract that is due for renewal a while from now.  The rates on some of Altisource's services could get adjusted downwards depending on whether or not the NY DFS decides to be hard asses.

 

Are you taking into account the agency MSR that Ocwen will be unloading? I don't think they will be subservicing them.

 

You got about ~$2 annualized from non related party EPS with very high growth rates. I don't think the recent headlines will impact this side of the business since they have their own wholesale channel market captured. What's left is a call option on Ocwen related revenue. The non agency MSR is practically the bulk of the high margin revenue and Ocwen will be holding onto those.

 

You can dig back to the 2011-2012 financials and see they had decent cash flow with only ~120billion UBP and no forced placed insurance. Non related party revenue was only half of today's run rate. The only wrinkle is the debt load. I wonder if they pulled back on the buybacks since the 3rd quarter. I'm hoping Erbey had an idea what was coming. If they went crazy then the majority of their FCF will be going towards paying down the debt and crossing their fingers.

[ItsAValueTrap]

You can dig back to the 2011-2012 financials and see they had decent cash flow with only ~120billion UBP and no forced placed insurance.

 

The one thing I don't like about OCN's and ASPS's SEC filings is that they barely mention insurance commissions/kickbacks on force placed insurance.  NSM and WAC had more information on it.  The OCN and ASPS 10-Ks did not seem to say anything about it until ASPS' more recent 10-Qs.  Transparency was low.

 

There is a 8-K/A filing (obscure!!) which talks about how ResCap's subsidiary Beltline was taking insurance commissions.  So we know that Ocwen got involved because it bought ResCap.  Yet the 10-Ks didn't really break out the risks.

 

Are you taking into account the agency MSR that Ocwen will be unloading? I don't think they will be subservicing them.

What Ocwen did with the OASIS notes is vaguely similar to subservicing.  It's possible they might do a combination of what they were doing in the past.

1- They tried to sell off some of the Ginnie Mae MSRs, though that sale fell through.

2- OASIS notes.

3- HLSS (though HLSS bought stakes in non-agency MSRs?)

 

Going forward, they might try to sell excess servicing rights.

 

I would characterize management's remarks as aspirational.  They want to sell their agency MSRs at good prices.  It will be a continuation of what they were doing in the past.  It will take time for them to sell the stuff because I believe it requires the approval of the relevant government sponsored enterprise.

 

What I see happening is that they will slowly sell off a lot of their agency MSRs though not all of it.  I doubt that they will be able to sell them off quickly.  They will also slowly buy up non-agency MSRs once the NY DFS' operations monitor makes benchmarks and Ocwen hits them (if Ocwen hits them).  The Monitor might make the benchmarks tough/onerous but achievable.  I doubt that the Monitor will make them impossible; the mortgage markets might freeze up in fear if the Monitor did that.  But because Lawsky is crazy, the benchmarks might be difficult/onerous to meet.

 

So I see slow growth happening.  I could be wrong.  And of course the regulatory environment is very dynamic and constantly changing.  Other things could happen.  Delinquencies depend on a number of different factors and affect Altisource's bottom line.

[scorpioncapital]

There is a provision in ASPS's debt covenants that require payments of 25% or 50% of free cash-flow to the lenders if the EBIT/EV ratio is higher than something like 3.5x.

 

I am trying to understand the delusion that caused ASPS's management to buyback at over $100 share a large amount of stock. I've seen companies buyback at 2x the current price, but this may top that record of substantial buybacks at 3x+ the current price.

 

Estimating the status quo net income to be in the range of 50 to 100m per year after all this blows over and assuming no growth in business. With 23 m shares , that's a respectable 15% initial yield at the upper end and a less exciting and average 10% at the low-to-mid range.

 

 

[colinwalt]

This blog post:

 

http://oraclefromomaha.wordpress.com/2014/12/20/interesting-links/

 

Starts off talking about "net neutrality" but then the comments end up being all about ASPS - starting here:

 

http://oraclefromomaha.wordpress.com/2014/12/20/interesting-links/comment-page-1/#comment-720

[ItsAValueTrap]

I am trying to understand the delusion that caused ASPS's management to buyback at over $100 share a large amount of stock. I've seen companies buyback at 2x the current price, but this may top that record of substantial buybacks at 3x+ the current price.

 

I don't think it's reasonable to expect management to accurately predict the future.  They didn't buy back that much stock at $100... they were mostly using the business' earnings to buy back stock.  In 3Q, they really really bought back stock.  The rate of the buyback was about 3-4x the normalized cash flow that the business throws off.

 

If you think that Altisource is a solid growth company, then it's not unreasonable to buy back stock at a P/E (adjusted for amortization of intangibles) of around 20.  That's what they were doing at around $100.  If you thought that Altisource could grow earnings at 30%/year, then maybe you buy back stock at a P/E of 30-40.

 

I don't think they expected Lawsky to go after them so hard.  It's like their worst expectations played out.  I think Ocwen/Altisource see themselves as being at the top of the heap in regards to compliance and #1 in making money for shareholders.

 

2- Recall that ASPS shareholders paid tax on the RESI/AAMC spinoff.  I guess management had the foresight to see that AAMC and RESI would be huge.  They wanted to get the business going right away and didn't try to find a way to structure it tax-efficiently.  They were definitely very confident that the new spinoff would work out well.

[100 Shares]

Looking at the buyback at $100 vs the share price today judging management isn't right.

 

1) Imagine this scenario, what would you be thinking if on the Q2 conference call an analyst asked what they were going to do with accumulated cash and why they halted their buyback? In response the CEO said, "we think the stock is attractively priced currently, but we are making a short term prediction that the stock price will go down, and when that happens we will buyback shares..."

 

2) In the article that was posted on Henry Singleton and Teledyne recently, it mentioned he did a tender offer and afterwards the stock fell like 25%, so he did another tender offer. As an investor, you can't be expected to and shouldn't time your buying. If the opportunity presents itself, buy, if the stock goes down, cheer and buy more.

 

I am certainly interested to see share repurchases in Q4.

[scorpioncapital]

True, but also consider the difference between buying back stock - forced reinvestment of dividends into the stock at a very high price relative to the present or paying out the cash flow as a dividend. Then the shareholder can decide if they want to reinvest it or take it elsewhere. With a buyback, management is always under the illusion the stock is cheap or fairly valued. It has an optimistic bias, dividends are more pragmatic.

 

 

[ItsAValueTrap]

True, but also consider the difference between buying back stock - forced reinvestment of dividends into the stock at a very high price relative to the present or paying out the cash flow as a dividend. Then the shareholder can decide if they want to reinvest it or take it elsewhere. With a buyback, management is always under the illusion the stock is cheap or fairly valued. It has an optimistic bias, dividends are more pragmatic.

 

Buybacks are more tax efficient than dividends.  Buffett even wrote about that in one of his letters.

[scorpioncapital]

True, but also consider the difference between buying back stock - forced reinvestment of dividends into the stock at a very high price relative to the present or paying out the cash flow as a dividend. Then the shareholder can decide if they want to reinvest it or take it elsewhere. With a buyback, management is always under the illusion the stock is cheap or fairly valued. It has an optimistic bias, dividends are more pragmatic.

 

Buybacks are more tax efficient than dividends.  Buffett even wrote about that in one of his letters.

 

That's for certain. Yet a mistake in a buyback campaign can make the tax savings similar to chasing nickels in front of a steamroller. I vote for buybacks when management is superior, dividends when I have doubts.

[Patmo]

True, but also consider the difference between buying back stock - forced reinvestment of dividends into the stock at a very high price relative to the present or paying out the cash flow as a dividend. Then the shareholder can decide if they want to reinvest it or take it elsewhere. With a buyback, management is always under the illusion the stock is cheap or fairly valued. It has an optimistic bias, dividends are more pragmatic.

 

Buybacks are more tax efficient than dividends.  Buffett even wrote about that in one of his letters.

 

That's for certain. Yet a mistake in a buyback campaign can make the tax savings similar to chasing nickels in front of a steamroller. I vote for buybacks when management is superior, dividends when I have doubts.

 

I vote for buybacks when the stock is cheap beyond any reason, reinvestment into the business when it isn't, paying back debt when it has too much, and dividends otherwise.

 

To this management's credit, they didn't buy back shares at a high price vs. the present share price, they bought back at a high price vs. then future price. They simply didn't see it coming, the reason why they didn't is up for interpretation but the fact is that the future was incorrectly predicted.

[yadayada]

If you have doubts, why do you invest... That means that on average you think the stock will go down. You invest because on average the stock will go up.

 

Let's say there is a 60% chance the stock is worth more, a 10% chance the stock is fairly valued, and a 30% chance the stock is overvalued, in that case buybacks are good. Even when possible bad outcomes exist. If you could only buy back when there is a zero % chance the stock can go down, almost no company should buy back and that would be a mistake.

 

You ahve to take into account the times when buy backs put your return on steroids in case the stock was undervalued, in taht case buybacks boost your return far more then dividends would have.

[scorpioncapital]

I think managements also buyback shares to make earnings look good each quarter. We mustn't forget all the reasons people do it, completely aside from valuation.

[yadayada]

Yeah but if you prefer dividends, then you are basicly saying, im holding an overvalued stock and I want dividends. That does not make sense. You shouldn't want dividends, you should want to sell the stock asap.

 

I think we all thought the stock was cheap at much higher levels then today before the bad news, so buybacks was clearly superior. Just got unlucky, that is all.

 

Just become a bad outcome is possible where buybacks would be bad in hindsight, does not mean buybacks are bad in the overall situation considering all the probability trees.

[ItsAValueTrap]

Interesting blog post on what it's like to buy a home from gohoming.com (now hubzu.com):

http://diydiva.net/2012/04/buying-a-house-through-gohoming-com-or-altisource-an-epic-journey-review/

 

I think that many consumers would not want to be through the crazy process of buying a house on Hubzu.  Many of them probably can't because they may not be able to get financing.

[Fat Pitch]

Interesting blog post on what it's like to buy a home from gohoming.com (now hubzu.com):

http://diydiva.net/2012/04/buying-a-house-through-gohoming-com-or-altisource-an-epic-journey-review/

 

I think that many consumers would not want to be through the crazy process of buying a house on Hubzu.  Many of them probably can't because they may not be able to get financing.

 

Read through the comments and it seems like you need to wear rubber gloves and have an attorney ready. The website has changed a lot since 2012. It's much more transparent and they added "traditional" sales instead of auction based. The only people who would be buying through Hubzu are those that want a deal and is willing to put up with all the hassles of bank REO properties.

 

I'm hoping Altisource pivots to non-distressed properties since the market is much larger. Just thinking out loud, someone lists their home on Hubzu and any potential buyer can get pre-approved for a loan from Ocwen mortgage bank... yeah I'm sure the regulators will be all over that  :P

 

[ItsAValueTrap]

Interesting blog post on what it's like to buy a home from gohoming.com (now hubzu.com):

http://diydiva.net/2012/04/buying-a-house-through-gohoming-com-or-altisource-an-epic-journey-review/

 

I think that many consumers would not want to be through the crazy process of buying a house on Hubzu.  Many of them probably can't because they may not be able to get financing.

 

Read through the comments and it seems like you need to wear rubber gloves and have an attorney ready. The website has changed a lot since 2012. It's much more transparent and they added "traditional" sales instead of auction based. The only people who would be buying through Hubzu are those that want a deal and is willing to put up with all the hassles of bank REO properties.

 

I'm hoping Altisource pivots to non-distressed properties since the market is much larger. Just thinking out loud, someone lists their home on Hubzu and any potential buyer can get pre-approved for a loan from Ocwen mortgage bank... yeah I'm sure the regulators will be all over that  :P

 

I think that some of the difficulties in the process have to do with the conflicts of interest between the servicer and the mortgage investor.  That, and weird behaviour mandated by the servicing contract.

 

The servicer does not want to properly renovate the house because they won't get compensated for doing so.  This can make it harder/impossible for the borrower to get financing.

Agents may not want to deal with REO because it's a lot more work for them.

 

It makes a lot more sense for the party selling the home to make repairs that obviously should be made.  It would also make sense for them to offer better service to make the whole process a lot more consumer-friendly.  As it stands, the process looks far more complicated than what ordinary Americans want to deal with.

 

2- Altisource is trying to pivot into the larger for sale by owner market as they purchased owners.com for $20M.  We'll see how that works out.

[yadayada]

any idea how that will cross sell? Are they going to use properties bought by RESI/AAMC for that website? It seems the main problem is a chicken and egg thing, and they are looking to boost owners.com using either hubzu or RESI?

[Fat Pitch]

I’ve been looking into Ellie Mae (ELLI) as a potential comparable to Altisource. Ellie Mae provides a Loan Origination System, Encompass, which helps mortgage lenders originate a loan and sell it to an investor. It’s basically a SaaS business model where the user pays a fee for each user and another variable fee for each loan that gets originated on the system.

 

With that said, the valuation that the market place is giving them is incredible. TTM OCF is roughly 33mm with a market cap of 1 billion. The mortgage industry is highly inefficient so there’s ample opportunity for a company to provide a solution that automates the whole loan origination process, but I’m just scratching my head at the large gap in value between ELLI and ASPS.

 

While ELLI seems laser focused on the loan origination side, ASPS is touching more aspects of the mortgage industry (servicing, defaulting management, real estate buy/sell, rental management, etc). The big difference of course is the large customer risk that Alitsource has, but their non-related revenue is growing at an impressive clip and nets more income than ELLI.

 

Ocwen is pivoting more aggressively into the origination side of the business and Altisource is going to be launching their next gen technologies for that initiative this year. It seems odd the market thinks Ellie Mae has this market locked down when their competitors covers more aspects of the real estate life cycle.

 

I will say the switching costs for Loan Origination Systems are incredibly high (if the LOS implementation fails then the mortgage lender is usually out of business) so that’s the one positive thing going for ELLI. There is also the aspect of the network effect at play here. The more mortgage lenders that use a particular system then that system has leverage over escrow/title companies to conform to their standards which will drive more automation and efficiency gains. I’m thinking this is going to turn into a winner takes all situation, but we are in the early innings.

 

Does anyone else have any thoughts on this?

[jay21]

My only thoughts on the origination side of the business is that there seems to be a trend toward outsourcing the compliance/back office work for smaller originators. Additionally, new regulations are increasing the amount of work. This should be good for service companies in the industry. I.E. they are becoming more important and there is a growing need for their services.

 

I dont view this as a winner take all situation given the fragmented nature of their target consumers. And rarely will you see true monopolies usually industries have an oligopoly structure with one or two strong competitors (although software may be a rare exception?)

 

Let me know if you disagree with any of the above as I am not as tuned into the origination side as some ppl with industry experience might be.

[yadayada]

If you think winner takes all, why is it bad or inconvenient if multiple systems are used by different originators? Especially if switching is such a huge pain in the ass. It has to be 'more convenient to all use one>staying with the current one'. So if switching sucks so much, not everyone using one service would suck even more.

[Fat Pitch]

The big issue on the origination side is the mortgage lender has to deal with countless of 3rd parties (ie title,escrow,whole brokers, credit check, etc). Each vendor has their own forms and ways of communicating back and forth. To achieve true automation someone must create a large enough network to obtain leverage over all the 3rd party vendors. This will force them to conform to some uniform standard to make transactions seamless and reduce overhead for handling physical paper.

 

As it currently stands, you literally need an army of paper pushers to originate a loan. The same data gets entered over and over… in this day and age that shouldn’t be the case, but this industry is dominated by old ways of thinking. Thus this presents a massive opportunity for someone to roll up the whole process.

 

Ellie Mae has the mission statement of automating the whole loan origination process and the market is giving them a tech start up multiple for it. Altisource on the other hand is the red headed step child, but they are trying to position themselves as the “Amazon” for the real estate market place.

 

I think the only reason for this discrepancy between the two companies is that Ellie Mae has the superior technology and Altisource has some jaded MS DOS platform, but I can’t get myself to buy into that notion. Is the market really giving a SaaS company with tremendous runway to grow a cigar butt multiple? What am I missing?

[yadayada]

Some jaded msdos platform? Is it that bad? That is like 1995 stuff.