ASPS - Altisource

[yadayada]

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. 

 

I looked up their rates on property valuation, and that seems to be in line with average costs. It is already established that their flagship, hubzu, is charging below market rates (Lawsky had to remove that accusation). And 2/3 of insurance revenue is non related party.

 

Finally the amortization I added back is not from investments in software. If you look at investment section in cash flow statement, you only see capex in hard assets and acquisitions. So you remove the amortization charge from their costs. This does appears to be one time.

 

Finally tech revenue is about 250m, with less then 10m in income. In 2011 that was 56m with 14m in operating income. They have stated already that margins will go up here, and they are taking one time costs here.

 

Also, these statements:

Ocwen has been a strong partner in helping California families save their homes from foreclosure. Ocwen's Shared Appreciation Modification and principal reduction products have and continue to provide sustainable resolutions for struggling families in California," stated Todd Emerson, CEO of Springboard, a non-profit, HUD-approved housing counseling agency formed in 1974 and dedicated to helping homeowners find the best solutions when facing difficulty with their mortgages.

"As an industry leader in mortgage loan modifications, both under government programs and in our proprietary program, Ocwen remains committed to assisting distressed homeowners. Since the outset of the mortgage crisis, Ocwen has provided more than 500,000 loan modifications nationwide and more principal reduction relief than any other mortgage servicer. In 2014 alone, Ocwen wrote down over $1.8 billion in principal on underwater mortgages nationwide," said Mr. Faris. "We did not originate the loans we service, but we have taken a leading role in helping to stabilize communities most affected by the financial crisis. We intend to continue to play a leading role in helping homeowners."

"Since the outset of the mortgage crisis, Ocwen has been the best mortgage servicer in assisting homeowners throughout the country, particularly in hard hit areas in California," said Faith Bautista, President and CEO of the National Asian American Coalition, a HUD-approved nonprofit organization with a focus on homeownership, diversity and consumer protection for underserved minority communities.  "No other bank or servicer has been as responsive as Ocwen in providing loan modifications, principal write downs and helping struggling families keep their homes."

 

dont really sound like they are crooks...

[jschembs]

"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

 

The 3:1 ratio relates only to a requirement to use excess cash flow to pay down principal; it's not a default event. If you read the default events, I don't see anything related to minimum leverage ratios (somewhat surprising).

[jschembs]

As a new long to the party, I'm trying my best to fight cognitive dissonance, and have plenty of strong bears on my Twitter feed, but it's worth noting ASPS currently trades at 3.2x EV/EBITA (not EBITDA) and 1.6 P/E (adjusting EV for the share purchases b/w 9/30 balance sheet and 10/20 10Q shares outstanding).

[philly value]

Look, I think the argument can be summed up pretty simply, the answering being nobody knows anything about the value of ASPS at this point. Looking at past earnings and cash flows will only be misleading, ASPS and OCN going forward will be very different companies and given how opaque the business is plus the uncertainty of how regulators will affect the operations, it's impossible to get a sense of what profitability will be going forward. Personally I thought for a long while that I understood these businesses and, particularly with OCN, had a good sense of downside value, but with the past two rounds of news that has been shattered. There appears to be little downside from the current trading prices, but of course I said that when prices were 2X current levels. Regardless I think buying ASPS or OCN securities needs to be thought of as a gamble with good odds and sized accordingly.

 

 

[Guest roark33]

Well said, philly value.  One thought I had was whether anyone had predicted or even imagined that Erbey would be forced to resign as a result of the NY settlement.  If you didn't predict that as a possible outcome or even a possibility, I question your ability to predict the settlement with California, CFPB or any other regulator...

[philly value]

Well said, philly value.  One thought I had was whether anyone had predicted or even imagined that Erbey would be forced to resign as a result of the NY settlement.  If you didn't predict that as a possible outcome or even a possibility, I question your ability to predict the settlement with California, CFPB or any other regulator...

 

Yeah, Ocwen/ASPS look like very good bets at $8/$17 based on the information available at this moment, but they similarly looked like very good bets at $14/$32 based on the information available two weeks ago, and looked like very good bets at $22/$50 based on the information available a month ago, and so on. But every time, substantial new information has been revealed that could not have been reasonably predicted, significantly changing the valuation. I think what yadayada and others are arguing, correctly (although I think yadayada's cash flow/earnings assumptions are too optimistic) regarding OCN/ASPS is that "A reasonable assessment of the current hard information implies the stock is undervalued." But I think the situation is such that the presence of unknowns and unknown unknowns has to be weighted heavily. You can't really factor that into a valuation, I think what it means is that any valuation should not be taken too seriously, only as a rough guess, and the high level of uncertainty be factored into making these a very small position.

[thepupil]

I hate Bill Erbey. I think he is a promotional and likely fraudulent scumbag. I think AAMC is a zero. With that said, OCN and ASPS are singing me a siren song. Yesterday's panic/destruction was so tempting to buy.  I am resisting; I've tied myself to the ship.

 

 

[rjstc]

Classic short squeeze going on. I was asked a few weeks ago to loan my shares out. I didn't but these shorts have got some huge profits now.

[mvalue]

Classic short squeeze going on. I was asked a few weeks ago to loan my shares out. I didn't but these shorts have got some huge profits now.

 

 

Why not? What rate did they offer you?

[jschembs]

Classic short squeeze going on. I was asked a few weeks ago to loan my shares out. I didn't but these shorts have got some huge profits now.

 

Are you saying this morning is a short squeeze?

[krazeenyc]

Classic short squeeze going on. I was asked a few weeks ago to loan my shares out. I didn't but these shorts have got some huge profits now.

 

Are you saying this morning is a short squeeze?

 

I'm going to guess he means bear raid - instead of short squeeze.

[jschembs]

Classic short squeeze going on. I was asked a few weeks ago to loan my shares out. I didn't but these shorts have got some huge profits now.

 

Are you saying this morning is a short squeeze?

 

I'm going to guess he means bear raid - instead of short squeeze.

 

Right, that's what I thought. Short squeezes tend to have a different dynamic...somewhat odd to see ASPS up w/OCN getting hammered again today.

[yadayada]

Well said, philly value.  One thought I had was whether anyone had predicted or even imagined that Erbey would be forced to resign as a result of the NY settlement.  If you didn't predict that as a possible outcome or even a possibility, I question your ability to predict the settlement with California, CFPB or any other regulator...

 

Yeah, Ocwen/ASPS look like very good bets at $8/$17 based on the information available at this moment, but they similarly looked like very good bets at $14/$32 based on the information available two weeks ago, and looked like very good bets at $22/$50 based on the information available a month ago, and so on. But every time, substantial new information has been revealed that could not have been reasonably predicted, significantly changing the valuation. I think what yadayada and others are arguing, correctly (although I think yadayada's cash flow/earnings assumptions are too optimistic) regarding OCN/ASPS is that "A reasonable assessment of the current hard information implies the stock is undervalued." But I think the situation is such that the presence of unknowns and unknown unknowns has to be weighted heavily. You can't really factor that into a valuation, I think what it means is that any valuation should not be taken too seriously, only as a rough guess, and the high level of uncertainty be factored into making these a very small position.

why is it optimistic? With the assumption they are not forced to sell their other MSR's, free cash flow is not likely to go below 100m$. Interesting that most would have agreed only months ago, but somehow this new information changed all that and gave everyone a negative bias. Ofcourse if they dont get much OCN revenue because regulators are forcing them out of business, then it looks pretty bleak for ASPS. But if that doesn't happen, homes still need to be sold, properties need to be valued, and their dialogue software is still being used on a much larger portfolio then a few years ago when earnings were close to a 100m$ for ASPS.

 

For probably the first half of 2015, when OCN still holds most of those 1.5bn$ of MSR"s, they also need to provide services to OCN to service those.

 

Also they spend 200m$ on their AI engine. I seriously doubt that thing alone is worthless. Then there is equator, hubzu, which has more listings then auction.com right now. Business from RESI/AAMC, software revenue of 250m$ that is growing very fast, and will have bigger margins in the future. 50m$ of FCF is really a horror scenario. If you think that is likely, then you should not hold the stock now.

 

Non related party revenue grew from 268m to 400m$ in 2014. If you assume 10% net profit margins on that, that would mean the stock is cheap based on just that.

 

Also in 2011 they made 70m$, had 170m$ non related party revenue, and this was on a OCN portfolio of only 100bn$ upb. Current that is roughly 400bn$. And will be 200bn$. And on average probably 300bn$ in 2015. So how the hell will they only make like 50m$ even with OCN, when services for this UPB is likely three times the size now? And with more then twice the non related party revenue?

 

The argument that they overcharge also does not fly. Hubzu does not overcharge, that is proven already. And for drive by valuations, and quick property inspections, they charged roughly 100$. Costs for drive by inspection is 50-75$. and a quick inspection going in the house costs upwards to 175$. So that seems in line. Most of their insurance is now non related party, so not much to lose there. And I doubt there are clear market rates for their dialogue engine (since they are basicly the only one), and this was not the largest part of their income.

[philly value]

Looking back a few years ago isn't a fair comparison because 3 years ago IIRC ASPS had no debt at all, now the debt figure is around $600M. That high leverage is now the significant risk.

 

Also your focus is on 2015 numbers which is maybe relevant for trading purposes but doesn't say much about valuation. If Ocwen sells a large chunk of MSRs and perhaps the rest decline in UPB or even fully runoff, cash flow will continually decline.

 

The extent of the ability of ASPS's technologies to be used outside of Ocwen and growth in that part of the business is uncertain but definitely leaves open the upside.

 

But I think without growth in the non-OCN business and with a significant MSR sell off immediately plus runoff scenario, I think you run into trouble servicing that $600M debt. There is almost certainly a good chunk of value still left here but not so certain there's a large amount of residual after that debt load. Its very significant at this point whether or not they repurchased a lot of shares and wasted the $200M of cash they had.

 

Just throwing out numbers for illustration: Say they do $200M unlevered cash flow this coming year. Cash flow declines 15% per year for perpetuity. 10% discount rate. Value of business is $800M. Let's say $100M of cash left plus the $600M of debt, leaves $300M of equity value (so stock is overvalued now). I'm just saying I think your are overestimating how much a declining stream of cash flows is worth.

[rjstc]

Classic short squeeze going on. I was asked a few weeks ago to loan my shares out. I didn't but these shorts have got some huge profits now.

 

Are you saying this morning is a short squeeze?

 

I'm going to guess he means bear raid - instead of short squeeze.

 

 

Sorry. Bear raid is right. They offered me 12% by the way.

[Hielko]

Classic short squeeze going on. I was asked a few weeks ago to loan my shares out. I didn't but these shorts have got some huge profits now.

 

Are you saying this morning is a short squeeze?

 

I'm going to guess he means bear raid - instead of short squeeze.

 

 

Sorry. Bear raid is right. They offered me 12% by the way.

Why not take the offer? I seriously don't understand why people don't want to lend out their shares. Free money!

[yadayada]

Can you lend them out on IB? At least can make some money on it then lol.

[yadayada]

Looking back a few years ago isn't a fair comparison because 3 years ago IIRC ASPS had no debt at all, now the debt figure is around $600M. That high leverage is now the significant risk.

 

Also your focus is on 2015 numbers which is maybe relevant for trading purposes but doesn't say much about valuation. If Ocwen sells a large chunk of MSRs and perhaps the rest decline in UPB or even fully runoff, cash flow will continually decline.

 

The extent of the ability of ASPS's technologies to be used outside of Ocwen and growth in that part of the business is uncertain but definitely leaves open the upside.

 

But I think without growth in the non-OCN business and with a significant MSR sell off immediately plus runoff scenario, I think you run into trouble servicing that $600M debt. There is almost certainly a good chunk of value still left here but not so certain there's a large amount of residual after that debt load. Its very significant at this point whether or not they repurchased a lot of shares and wasted the $200M of cash they had.

 

Just throwing out numbers for illustration: Say they do $200M unlevered cash flow this coming year. Cash flow declines 15% per year for perpetuity. 10% discount rate. Value of business is $800M. Let's say $100M of cash left plus the $600M of debt, leaves $300M of equity value (so stock is overvalued now). I'm just saying I think your are overestimating how much a declining stream of cash flows is worth.

 

My point is, they will generate significant cashflow in the next few years to pay down debt. After that they will fall back on their growing non OCN businesses. Which have been growing at double digit. I dont think it will go to zero.  The problem is, I dont know exactly how they work, but im betting they will be worth a lot more then current cigarbutt price. If their software business generates maybe 40-50m$ a year, adn debt is reduced to maybe a 100m$, then looking at ellie may, this thing should be worth at least double of what it is trading now. My guess is, the bears will be at least partially proven wrong in the next 6 months, and price will bounch back ot like 40-50$. At which point I will probably sell at a loss .

[Ross812]

Looking back a few years ago isn't a fair comparison because 3 years ago IIRC ASPS had no debt at all, now the debt figure is around $600M. That high leverage is now the significant risk.

 

Also your focus is on 2015 numbers which is maybe relevant for trading purposes but doesn't say much about valuation. If Ocwen sells a large chunk of MSRs and perhaps the rest decline in UPB or even fully runoff, cash flow will continually decline.

 

The extent of the ability of ASPS's technologies to be used outside of Ocwen and growth in that part of the business is uncertain but definitely leaves open the upside.

 

But I think without growth in the non-OCN business and with a significant MSR sell off immediately plus runoff scenario, I think you run into trouble servicing that $600M debt. There is almost certainly a good chunk of value still left here but not so certain there's a large amount of residual after that debt load. Its very significant at this point whether or not they repurchased a lot of shares and wasted the $200M of cash they had.

 

Just throwing out numbers for illustration: Say they do $200M unlevered cash flow this coming year. Cash flow declines 15% per year for perpetuity. 10% discount rate. Value of business is $800M. Let's say $100M of cash left plus the $600M of debt, leaves $300M of equity value (so stock is overvalued now). I'm just saying I think your are overestimating how much a declining stream of cash flows is worth.

 

My point is, they will generate significant cashflow in the next few years to pay down debt. After that they will fall back on their growing non OCN businesses. Which have been growing at double digit. I dont think it will go to zero.  The problem is, I dont know exactly how they work, but im betting they will be worth a lot more then current cigarbutt price. If their software business generates maybe 40-50m$ a year, adn debt is reduced to maybe a 100m$, then looking at ellie may, this thing should be worth at least double of what it is trading now. My guess is, the bears will be at least partially proven wrong in the next 6 months, and price will bounch back ot like 40-50$. At which point I will probably sell at a loss .

 

What happens to the ASPS contract if someone buys OCN to get their MSR's?

[mcmaaaaath]

Ross812 I think that is the $1B question. From ASPS's 10-k, their contract with Ocwen goes out to 2025 with "termination under certain provisions" (in the 2009 10k they say the contract only extended out 8 years):

 

We currently generate approximately 65% of our revenue from Ocwen and its subsidiaries.  Ocwen is contractually obligated to purchase certain services from our Mortgage Services, Financial Services and Technology Services segments under service agreements that extend through August 2025 subject to termination under certain provisions.

 

The 2009 prospectus had the following as a risk factor, still with no details about what the "certain provisions" are.

 

A substantial part of our revenues and external cash flows will be generated by providing outsourcing services to Ocwen, and we are exposed to the risk of Ocwen’s termination, non-renewal or inability to pay for such services.

 

I'm guessing the actual Ocwen/ASPS servicing agreement is filed somewhere. It seems like this is very relevant to the value of Ocwen too. If Nationstar could sub in Solutionstar for Altisource, the value of Ocwen's business to them goes up significantly.

[ItsAValueTrap]

What happens to the ASPS contract if someone buys OCN to get their MSR's?

 

I think somebody could buy the MSRs without being obligated to drive revenues towards Altisource.  It might take them a few to several months to board the loans onto whatever servicing platform they use.

[Guest roark33]

I bet berkadia might be interested in OCN's MSR at some price, regulators would like it because it provides a deep pocket.  But, they would cut ASPS off immediately.  This is one reason I am so bearish on ASPS, if someone buys the MSRs from OCN, ASPS's non-OCN revenue will not support the debt load, in my opinion.   

[thepupil]

I bet berkadia might be interested in OCN's MSR at some price, regulators would like it because it provides a deep pocket.  But, they would cut ASPS off immediately.  This is one reason I am so bearish on ASPS, if someone buys the MSRs from OCN, ASPS's non-OCN revenue will not support the debt load, in my opinion. 

 

Berkadia, for now at least, is a commercial mortgage servicer and underwriter. Not sure if they are the logical buyer or if there are any synergies. They are focused on agency underwriting and servicing; it's a lot different than Ocwen's bread and butter.

[morningstar]

Nibbling on ASPS yesterday and this morning at $17-18.50. Co is priced under 4x my adjusted LTM EBITDA (with FPI-related EBTIDA of $65m assumed to be lost) and forward EBITDA will probably be higher as some acquisitions annualize into the figure). Still sizing the position to reflect high volatility and the possibility of total loss, but I think there is a good bit of upside from here, and in the end a fundamental tailwind as over the next 5 years a lot more money will be spent for every mortgage being serviced in the US.

 

Key assumptions I'm making are that (1) OCN ultimately sells very few MSRs, even among the ones it has said it wants to offload - I think market illiquidity will probably prevent them from making much progress, and I don't think regulators are actually interested in seeing their existing MSRs transferred away; (2) ASPS can navigate its debt burden from cash flow - I think it is better positioned re: liquidity than OCN; and (3) OCN has little incentive, ability, or need to move key service arrangements away from ASPS, nor would regulators really want to require this (they might be repriced lower however).

 

Overall, ASPS pricing seems to reflect existential risks that I think probably don't exist.

[redhots]

The Ax Is Falling at Altisource Today

http://bostinno.streetwise.co/2015/01/14/altisource-layoffs-hit-boston-as-ocwen-problems-mount/

 

An Altisource employee told BostInno layoffs hit first thing Wednesday morning. The number was unknown, but the employee said the office rumor mill put it at 60. A spokesman confirmed Altisource has made employee cuts and issued a statement, which I've reproduced below.

 

Update: If 60 is indeed the number of cuts in Boston, it's far less than Altisource is reportedly undertaking in another city.

 

Massive Firing in Altisource Bangalore...Around 300 shown Pinkslips today..The scenario is very common in almost all companies.. #Achhedin