Guest roark33 Posted January 13, 2015 Share Posted January 13, 2015 Here are the numbers that have always confused my about the bull thesis on ASPS. From the latest 10Q. Revenue: 823 Cost of Services: 520 OCN Revenue: 502 OCN Cost of Services: 27 These numbers seem to imply that the non-OCN revenue is very, very unprofitable: Non-OCN Revenue: 321 Cost of Non-OCN Revenue: 497 Loss: -197 So, when people talk about ASPS diversifying away from OCN, it just doesn't seem to make sense. I may be missing something, but.... Link to comment Share on other sites More sharing options...
jschembs Posted January 13, 2015 Share Posted January 13, 2015 I think that assumes the Erbey complex wasn't involved in fraudulent activities to begin with. In the 90s when OCN got big, the regulator took away its ability to bid on defaulted loans because of bad acts. Basically, in my opinion, Erbey's entities have always been doing shady things, but when they are small they fly under the radar of regulators. When he gets big, the regulators take notice. It's like a small time pot dealer, no one bothers him, but when he bigs growing acres of pot, then the regulators take notice. The actions were always illegal, so the idea that he wouldn't push the envelope isn't appropriate. Good point. Still seems odd Erbey wouldn't have been selling down his stake during this period, rather than using ASPS cash to repurchase shares and increase his ownership. Link to comment Share on other sites More sharing options...
jay21 Posted January 13, 2015 Share Posted January 13, 2015 OCN Cost of Services: 27 Sorry, can you point me to this number in the 10-Q (page number or quote i can search for)? Link to comment Share on other sites More sharing options...
Guest roark33 Posted January 13, 2015 Share Posted January 13, 2015 Sure, it's on page 4 of the most recent 10Q, under the heading, Transactions with related parties included above: Look to the nine months ending Income statement section... Link to comment Share on other sites More sharing options...
scorpioncapital Posted January 13, 2015 Share Posted January 13, 2015 I saw Erbey on a Youtube interview a little while back he said they are always paranoid at their company. While one can take this to mean they are cautious, it also begs the question, why do you have to be so paranoid unless you are close to the edge? :) There is great uncertainty about future earnings, but this could be a cigar butt with a value higher than the current prices. Still hard to wrap my mind around a management that bought back shares at triple and quadruple the share price in large amounts. If we as investors demand a margin of safety, where is their margin of safety? Link to comment Share on other sites More sharing options...
jay21 Posted January 13, 2015 Share Posted January 13, 2015 Sure, it's on page 4 of the most recent 10Q, under the heading, Transactions with related parties included above: Look to the nine months ending Income statement section... Ok, take a look at the footnote explaining that: "Cost of Revenue At times, we use Ocwen’s contractors and/or employees to support Altisource related services. Ocwen bills us for these contractors and/or employees based on their fully-allocated cost. Additionally, we purchase certain data relating to Ocwen’s servicing portfolio in connection with a Data Access and Services Agreement. The Data Access and Services Agreement may be renegotiated and may be cancelled by either Altisource or Ocwen with 90 days prior written notice. Ocwen bills us a per asset fee for this data. For the nine months ended September 30, 2014 and 2013, Ocwen billed us $27.9 million and $14.0 million, respectively ($11.1 million and $5.0 million for the third quarter of 2014 and 2013, respectively). These amounts are reflected as a component of cost of revenue in the condensed consolidated statements of operations." I dont think that number represent what you thought it did. the $27.9m is the amt of ASPS expenses that are OCNs revenue Link to comment Share on other sites More sharing options...
netnet Posted January 13, 2015 Share Posted January 13, 2015 After this latest shoe dropped, I realized that I really do not have enough experience to adequately handicap the odds on the Erbey complex surviving let alone flourishing. I was expecting perhaps other AG's coming in, but this is not even an AG. Despite the current drop, this business is just too hard for me. To not even be able to figure it out, after the seeming finality of the Lasky deal, just shows well I'm out of my depth on this one. My thinking/process was: look at a technology company that is servicing a client that is in trouble, what are the odds that that service contracts will be there no matter who has the underlying paper, etc. This thing is to paraphrase Churchill: ... a riddle, wrapped in a mystery, inside an enigma. For me, this is now in the too hard pile (where it really should have been all along). I don't know whether this is a falling knife or a silver spoon! Link to comment Share on other sites More sharing options...
Guest roark33 Posted January 13, 2015 Share Posted January 13, 2015 Sure, it's on page 4 of the most recent 10Q, under the heading, Transactions with related parties included above: Look to the nine months ending Income statement section... Ok, take a look at the footnote explaining that: "Cost of Revenue At times, we use Ocwen’s contractors and/or employees to support Altisource related services. Ocwen bills us for these contractors and/or employees based on their fully-allocated cost. Additionally, we purchase certain data relating to Ocwen’s servicing portfolio in connection with a Data Access and Services Agreement. The Data Access and Services Agreement may be renegotiated and may be cancelled by either Altisource or Ocwen with 90 days prior written notice. Ocwen bills us a per asset fee for this data. For the nine months ended September 30, 2014 and 2013, Ocwen billed us $27.9 million and $14.0 million, respectively ($11.1 million and $5.0 million for the third quarter of 2014 and 2013, respectively). These amounts are reflected as a component of cost of revenue in the condensed consolidated statements of operations." I dont think that number represent what you thought it did. the $27.9m is the amt of ASPS expenses that are OCNs revenue I never thought it was fully the correct numbers, because they made no sense. My general point was that the non-OCN revenue may or may not be profitable. I just don't think it is profitable, or if so, barely profitable. Link to comment Share on other sites More sharing options...
scorpioncapital Posted January 13, 2015 Share Posted January 13, 2015 You can try to compare the company to 2009 from the 10K. They earned 26 million net (36 m operating) and had 200m in revenues. They had 24 million shares. In 2013 they had 786m and 130m net. They have 22 million shares now. The stock price back then was around $15-$18/share, the current trading price. So net income would have to drop a pretty big amount back to 25 million and with the 2 million less shares, it would still be a bit undervalued. Of course, this assumes ~ a 5 fold cut in business. To some degree this does seem like an over-reaction but only time will tell. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 13, 2015 Author Share Posted January 13, 2015 http://www.dbo.ca.gov/ENF/List/O/ocwenloanservicingllc.asp So it looks like that in October 2014, the regulator was already trying to revoke Ocwen's license. Prior to that for several months, the regulator had been requesting a lot of information and Ocwen only provided some of that information (and was late in doing so). Link to comment Share on other sites More sharing options...
Guest roark33 Posted January 13, 2015 Share Posted January 13, 2015 ASPS scheduled a conference call for this Friday... The links that Glenn just posted are interesting. It seems like this should have been disclosed by OCN. http://www.dbo.ca.gov/ENF/pdf/2014/OcwenLoanServicingLLC_Accusation.pdf Link to comment Share on other sites More sharing options...
Picasso Posted January 13, 2015 Share Posted January 13, 2015 Why was that not disclosed and why was Ocwen not giving the regulator the requested information? It is sort of funny seeing that $1,000 penalty. The penalty for shareholders has been much worse. Link to comment Share on other sites More sharing options...
scorpioncapital Posted January 13, 2015 Share Posted January 13, 2015 "In addition to the scheduled principal payments, the Refinancing Debt is (with certain exceptions) subject to mandatory prepayment upon issuances of debt, casualty and condemnation events and sales of assets, as well as from a percentage of excess cash flow (as defined in the senior secured term loan agreement) if the leverage ratio (as defined in the senior secured term loan agreement) is greater than 3.00 to 1.00" I suspect Friday, they may talk about this. They are now in a distressed debt situation with the 400m secured long term loan and Bank of America will probably make them pay a % of cash-flows to the debt servicing since the leverage ratio (88m equity vs $400m debt) is > 3:1. Also buybacks are out of the question. Link to comment Share on other sites More sharing options...
jay21 Posted January 13, 2015 Share Posted January 13, 2015 "In addition to the scheduled principal payments, the Refinancing Debt is (with certain exceptions) subject to mandatory prepayment upon issuances of debt, casualty and condemnation events and sales of assets, as well as from a percentage of excess cash flow (as defined in the senior secured term loan agreement) if the leverage ratio (as defined in the senior secured term loan agreement) is greater than 3.00 to 1.00" I suspect Friday, they may talk about this. They are now in a distressed debt situation with the 400m secured long term loan and Bank of America will probably make them pay a % of cash-flows to the debt servicing since the leverage ratio (88m equity vs $400m debt) is > 3:1. Also buybacks are out of the question. That isnt what leverage ratios typically are. Usually relates EBITDA to Debt Asset sales, etc. can be a concern tho Link to comment Share on other sites More sharing options...
scorpioncapital Posted January 13, 2015 Share Posted January 13, 2015 Ah yes, then mostly likely later in the year or next the debt issue will come up. They have to earn at least 130m EBITDA. I predict, ASPS will be earning 1/2 of that at best in the next year or two. This covenant will definitely be broken in time. Link to comment Share on other sites More sharing options...
yadayada Posted January 13, 2015 Share Posted January 13, 2015 So in 2014 they probably made around 200m$, now the market cap is 350m$. You will need to see a serious hit in valuation to justify current market cap. I cannot believe they made these rookie errors though. Net debt is probably around 400m$ now? Unless other regulators kill their business, FCF will probably be 100-160m$ in 2015. I guess we will see. Makes no sense to sell now. Link to comment Share on other sites More sharing options...
Guest roark33 Posted January 13, 2015 Share Posted January 13, 2015 Your numbers are seriously off..... Think buybacks this past quarter, purchase of by owner website, and serious decline in cash flow.... Link to comment Share on other sites More sharing options...
yadayada Posted January 13, 2015 Share Posted January 13, 2015 Adding back amortization of 30m$, I get 176m$ in earnings in last 9 months. Since earnings in Q4 probably did not take much of a hit, that is another 40m$ or so in Q4. Owners.com cost htem 20m$. Debt is 590m$ in Q3. Cash is 176m$. So unless they splurged on buybacks, I dont see how I am way off? Maybe they spend a 100m$ on buybacks, in that case it is 500m$ in net debt. So unless regulators start actually shutting down OCN, ASPS will generate north of 100m$ in FCF for at least the next few years. They also have large receivables that they will still get if their business dwindles. I doubt debt will be a serious problem unless OCN is forced to do a firesale on their MSR's. Link to comment Share on other sites More sharing options...
Liberty Posted January 13, 2015 Share Posted January 13, 2015 yadayada, are you buying more? Link to comment Share on other sites More sharing options...
yadayada Posted January 13, 2015 Share Posted January 13, 2015 No im fully invested. And this position was over 10% at some point. I think if you look at upside/downside, there are better idea's with less head ache. But if i did not own anything, I would make a 3-4% position with what I know now. I was already a bit uneasy about making this 10%, and I should have listened to my gut and kept it small, or with regulatory troubles demand like a PE multiple of 3-4 instead of 10x. What makes me think they are not rotten to the core is that Erbey took on debt to buy back stock. I don't think he is that stupid. Unless something is happening that Erbey is not aware of because of serious incompetence or corruption somewhere down the line. And what protects downside (which is at this point that OCN is forced out of business) is that regulators would be shooting themselves in the foot if they forced OCN to sell their MSR's. Homeowners would be seriously hurt by that. As it will mean a lot of admin errors as they move platforms. A much more likely outcome is more strict controls and higher costs, and regulators looking over OCN's shoulders like nazi's. So meanwhile, unelss OCN is shut down, ASPS will still generate 100m$+/year for some years to come. I still believe that they do a good job. It would be very unlikely that they get less complaints both online and at CFPB if they really did such a worse job vs banks and other servicers. I think OCN is used as an example really. Finally, not just on CFP they get less complaints, but on websites like this as well: http://www.consumeraffairs.com/finance/nationstar_mortgage.html http://www.consumeraffairs.com/finance/ocwen_loan.html http://www.consumeraffairs.com/finance/ba.htm The fewest complaints, despite owning the most non performing loans. Interesting that Nationstar suddenly added a lot of 5 star reviews in the past months :) . Just 2 months ago, it was 1 star as well. Link to comment Share on other sites More sharing options...
Guest roark33 Posted January 13, 2015 Share Posted January 13, 2015 I think they did spend a ton on buybacks, and I think their cash flow evaporates much quicker than you think for two reasons. MSRs are naturally evaporating assets, OCN will sell MSRs and foreclosure activity is continuing to decline. Those don't even touch on the renegotiated fees that we will most likely see after the NY DFS monitor looks at the "arms-length transactions." Add in the CA regulator and every number you got from last year's 10K is basically worthless... But, in the end, I think they are crooks and the business is just not worth anything when you have to parse out how much of it is tainted by the shady business practices. Link to comment Share on other sites More sharing options...
yadayada Posted January 13, 2015 Share Posted January 13, 2015 I think they did spend a ton on buybacks, and I think their cash flow evaporates much quicker than you think for two reasons. MSRs are naturally evaporating assets, OCN will sell MSRs and foreclosure activity is continuing to decline. Those don't even touch on the renegotiated fees that we will most likely see after the NY DFS monitor looks at the "arms-length transactions." Add in the CA regulator and every number you got from last year's 10K is basically worthless... But, in the end, I think they are crooks and the business is just not worth anything when you have to parse out how much of it is tainted by the shady business practices. so you think they did buybacks, and they are crooks. Really man, this is starting to look like a seeking alpha comment section. To break it down and waste more time on this one: In latest 10q, 60% of their revenue came from related parties (less income, because a lot of this growth comes from technology services). So if you think income will fall of a cliff from 170m$ (this is excluding force placed insurance) to like 30-40m$, they would have to lose all their related party income, and then some. And hubzu is a significant part of that. There have been 100k properties sold on hubzu, and I see there are about 20k on it now. There are still new ones being added from recent MSR purchases. Also RESI has about 12k loans, most of them non performing. It is expected that half of their portfolio is being sold in short sales. They are not under fire from regulators (their portfolio grew from 8k to 12k through this whole mess). Could see a lot of new loans being added by resi there in the future. Plus growing non related party revenue. And finally, Rescap (the part that will not be sold) was only fully transfered to OCN in June 2014. This was by far the largest and worst portfolio of loans. So I dont think income from this to Hubzu will fall of a cliff just yet. Also non related party revenue for Hubzu grew from like 9% to 22% on growing revenue there. Technology service revenue grew over 100% in one year, and only 41% is related party revenue. And they have contracted margins there for now due to investment spending. Insurance services, 2/3 is non related party revenue and growing... The only thing that will really fall of a cliff is probably property valuation services, which is about 100m$ in revenue. I can see Hubzu generating nice income for at least a year or two. So probably 130m$ in 2015, and maybe 100m$ in 2016. Which would bring debt down by almost half. If they manage to grow Hubzu non related party revenue, and grow their technology services, it could stay above a 100m$. They have said that margins will go up for their tech segment. So 50m$ of income in 2015 is really really pesimistic here I think. Link to comment Share on other sites More sharing options...
Ross812 Posted January 13, 2015 Share Posted January 13, 2015 I think they did spend a ton on buybacks, and I think their cash flow evaporates much quicker than you think for two reasons. MSRs are naturally evaporating assets, OCN will sell MSRs and foreclosure activity is continuing to decline. Those don't even touch on the renegotiated fees that we will most likely see after the NY DFS monitor looks at the "arms-length transactions." Add in the CA regulator and every number you got from last year's 10K is basically worthless... But, in the end, I think they are crooks and the business is just not worth anything when you have to parse out how much of it is tainted by the shady business practices. so you think they did buybacks, and they are crooks. Really man, this is starting to look like a seeking alpha comment section. To break it down and waste more time on this one: In latest 10q, 60% of their revenue came from related parties (less income, because a lot of this growth comes from technology services). So if you think income will fall of a cliff from 170m$ (this is excluding force placed insurance) to like 30-40m$, they would have to lose all their related party income, and then some. And hubzu is a significant part of that. There have been 100k properties sold on hubzu, and I see there are about 20k on it now. There are still new ones being added from recent MSR purchases. Also RESI has about 12k loans, most of them non performing. It is expected that half of their portfolio is being sold in short sales. They are not under fire from regulators (their portfolio grew from 8k to 12k through this whole mess). Could see a lot of new loans being added by resi there in the future. Plus growing non related party revenue. And finally, Rescap (the part that will not be sold) was only fully transfered to OCN in June 2014. This was by far the largest and worst portfolio of loans. So I dont think income from this to Hubzu will fall of a cliff just yet. Also non related party revenue for Hubzu grew from like 9% to 22% on growing revenue there. Technology service revenue grew over 100% in one year, and only 41% is related party revenue. And they have contracted margins there for now due to investment spending. Insurance services, 2/3 is non related party revenue and growing... The only thing that will really fall of a cliff is probably property valuation services, which is about 100m$ in revenue. I can see Hubzu generating nice income for at least a year or two. So probably 130m$ in 2015, and maybe 100m$ in 2016. Which would bring debt down by almost half. If they manage to grow Hubzu non related party revenue, and grow their technology services, it could stay above a 100m$. They have said that margins will go up for their tech segment. So 50m$ of income in 2015 is really really pesimistic here I think. They have 12% (from 20%) net margins when insurance kick backs are excluded. My concern is there are other high margin services that don't pass the smell test. They have 1B in revenues right now. If its a 40 - 60 split and OCN revenue is halved next year; you are at income of 84M. If this happens then you may be fine. What I am worried about is another high margin business line that new managements/regulators think is way out of line. The insurance kick back business was 99% profit and had been established as fraud in previous court cases. Do you really think this was the only shady thing ASPS was up to? I don't know what the margin is on their software side and I don't think you can necessarily just add back in those amortized costs because they are going to be necessary to fuel growth. You can talk about growth all you want but that is betting on the company reinventing itself, and we have no idea what their margins are ex-OCN. Link to comment Share on other sites More sharing options...
Guest roark33 Posted January 13, 2015 Share Posted January 13, 2015 Yadayada.... If you don't think they are crooks, please explain the fact that California was seeking to suspend their license to operate in the state in Oct 2014 and they just disclosed this.... I think the ambulance chasing securities lawyers are a joke, but in this case, I can't see how you could plausibly think this wasn't a material event that needed to be disclosed when roughly 23% of your UPB is in this state? http://www.dbo.ca.gov/ENF/pdf/2014/OcwenLoanServicingLLC_Accusation.pdf I see nothing wrong with buybacks and the idea that there is corporate fraud. In fact, buybacks allow for people to think you aren't a fraud, which makes it even more likely that bad actors would want to perform buybacks.... The conference call should be interesting.... Link to comment Share on other sites More sharing options...
yadayada Posted January 13, 2015 Share Posted January 13, 2015 Regarding to Hubzu (largest earner now), you can look at it like this. They sold 100k homes. Before 2013 they made 281 million $ in revenue there. Then in 2013 it was 200m$, and in 2014 first 9m it was 271m$. And that 280m$ pre 2013 was earned on about 400k loans? Maybe a bit more. If you only count the ones that were bought in 2010 and 2011, that is 420k loans. Probably a bit more as OCN serviced some loans before that period. It takes like a year or more to go from owning the loan to selling off the house. So this generated 280m$ in revenue on lets say 500k loans? Delinq ratio was like 25% though I think. So that is roughly 100-125k delinquencies. In 2013 and 2014 they bought 2.5 million loans. So I find it hard to believe Hubzu income will fall of a cliff this year. They will sell like half of that? And the ones they sell will have the lowest delinquency ratio. So that is 1.2 million loans? I think their current portfolio has like a 18% delinq ratio. That is 350k loans delinquent. They sell half, so they still have about 170k non delinquent loans (probably more as they sell the good ones). So that means there is still probably about 3-400m$ in revenue left for Hubzu just from that (as we established that ~125k delinq loans generated 281m$ for Hubzu, 170k must at least generate 300m$). So this alone is probably a 100m$ in income in the next 2 years, assuming profit margins of 25%. Then there is RESI, which has like 11k 60 day delinq loans (96% of their portfolio is non delinquent), and that number is likely to grow. And there is revenue from on related parties that is 22% and growing. And finally, while they sell off their agency MSR's, there will be some foreclosures too. So that is probably 500m$ of high margin revenue in the next 2 years, just from Hubzu. The more I think about it, this entire thesis hinges on 4 things. Their property platform, Hubzu, and possibly owners.com (the largest component?). Second, technology services automating the mortgage market, insurance services to non related parties (10% of their revenue) and finally their AI technology platform (REALservicing). I think just their technology segment could do 30-40m$ in income. In just 2011, it generated about 15m$ in operating income with really nice margins. But in 2014 it probably only generates about 8-9m$ on more then 4x as much revenue. Link to comment Share on other sites More sharing options...
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