ASPS - Altisource

[Phaceliacapital]

http://oraclefromomaha.wordpress.com/2014/04/29/altisource-portfolio-solutions/

[jay21]

It seems like the board thinks this is a better business than OCN (and may also be a better opportunity).  I spent some time going through a few presentations and filings and I am having a tough time articulating what they actually do.  I guess they are a technology and service provider?

 

The one thing I like is that the growth is tied to OCN, which I think has quite a bit more growing to do.  I may initiate a position 2-1 in OCN's favor because I understand OCN better (I think) for a good chunk of the portfolio (10-20%). 

 

Also, based on what I have seen so far OCN now reminds me of BAC at 10.  I see a double given the current earning power/assets and I think it has franchise/growth value where the value can be much higher in a few years time.  ASPS probably fits this as well.

[ItsAValueTrap]

Ocwen:

 

-Ocwen is inherently a big bet on prepayment risk.  Prepayment risk is kind of bizarre in my opinion and is affected by a large number of factors.  Because the prepayment risk has been going down, Ocwen's intrinsic value has gone up a lot.

-When Ocwen initially buys a MSR portfolio, it has a lot of costs in boarding the loans underlying the MSRs onto its technology platform.  It also needs to hire people.  After these initial costs are dealt with, the MSR portfolio starts throwing off more cash.

 

-Ocwen owns a lot of agency MSRs.  On these MSRs, they are able to sell OASIS notes which try to push prepayment risk onto the OASIS noteholders.

-The reason why Ocwen wants to get rid of prepayment risk is because they need to hold capital in case prepayments spike.  If the economy tanks, Ocwen could end up in a nightmare scenario where prepayments spike due to people losing their jobs and the government lowering interest rates and the cost of servicing going up due to foreclosures.  If they didn't have to deal with prepayment risk, they could use their capital for things that have higher returns (e.g. exploiting Ocwen's cost advantage in servicing mortgages).

 

I haven't learned how to value Ocwen's MSR portfolio.

 

Altisource:

-Mostly fee-based, doesn't have a lot of risky assets on its balance sheet.  It has lots of debt now, which is a source of risk/leverage.

-A hodgepodge of businesses, though the majority of its revenues come from Ocwen.

-Earnings slightly obscured by amortization of intangible assets from Equator acquisition

-Earnings slightly obscured by interest payments.

-Earnings slightly obscured by Equator and Hubzu being development-stage companies.

-Financial services segment not doing that great.  Altisource does some debt collection... that business is mediocre compared to the rest of Altisource.  I don't believe that they own consumer debt (like ASFI and ASFI's competitors); they just try to collect on the debt on a "contingency fee basis".

-The highly profitable default services segment is expected to see its revenues decline in the future as the levels of foreclosures die down.

[jay21]

Ocwen:

 

-Ocwen is inherently a big bet on prepayment risk.  Prepayment risk is kind of bizarre in my opinion and is affected by a large number of factors.  Because the prepayment risk has been going down, Ocwen's intrinsic value has gone up a lot.

-When Ocwen initially buys a MSR portfolio, it has a lot of costs in boarding the loans underlying the MSRs onto its technology platform.  It also needs to hire people.  After these initial costs are dealt with, the MSR portfolio starts throwing off more cash.

 

-Ocwen owns a lot of agency MSRs.  On these MSRs, they are able to sell OASIS notes which try to push prepayment risk onto the OASIS noteholders.

-The reason why Ocwen wants to get rid of prepayment risk is because they need to hold capital in case prepayments spike.  If the economy tanks, Ocwen could end up in a nightmare scenario where prepayments spike due to people losing their jobs and the government lowering interest rates and the cost of servicing going up due to foreclosures.  If they didn't have to deal with prepayment risk, they could use their capital for things that have higher returns (e.g. exploiting Ocwen's cost advantage in servicing mortgages).

 

I haven't learned how to value Ocwen's MSR portfolio.

 

- Oasis is huge because they can off load prepayment risk as you note.  HLSS is also a pretty good funding source.  They are trying to be as capital light as possible and off load their funding to other structures so that way OCN is a pure play on their cost advantage as a sub-servicer and can grow without adding capital.

- I don't think they need to hold as much capital as they do.  Their peers are more levered and CPR for non-agencies is probably much more idiosyncratic than agencies so I don't think dropping rates will hurt nearly as much as other agency vehicles. 

- You don't need to value MSRs yourself.  Just take a look at OCN's recent presentation: http://files.shareholder.com/downloads/ABEA-6F4AAO/3127280518x0x750129/076aee47-c2da-4aee-9846-52a8130e9717/Q1_2014_OCN_Presentation_01-May-2014.pdf

 

They use broker quotes so I think it's pretty independent in terms of valuation

 

- Originations can mitigate prepayment risk.  I don't see CPRs changing drastically in the next 2 years and I think by then their origination platforms will be material.  This is one source of upside I see.  It should also affect ASPS.

 

- Also, I believe that slide 16 in that link gives a good low estimate of value.  I see a few sources of upside that can really push that value up.

 

- I think we are largely in agreement.

[ItsAValueTrap]

So Ocwen's presentation (page 16) puts the fair value of Ocwen's book value at $5.3B.

Ocwen was willing to repurchase shares at an average cost of $56.54, which translates to a market cap of roughly $7.6B.  Current market cap is $4.75B.

 

They're paying a premium over book value because they see value in Ocwen's franchise.

[yitech]

SEC investigating Ocwen Financial

 

http://www.bizjournals.com/atlanta/news/2014/05/05/sec-investigating-ocwen-financial.html

[wbr]

The Value Venture article on Altisource made me curious so I did some of my own work.

 

As Value Venture points out the company doesnt look as cheap on GAAP earnings, but on a cashflow basis it looks pretty good with 2013 OCF of $185 mln and Capex of $34 mln (which is probabaly mostly maintenace). So with FCF of $150 mln it trades for 15x trailing FCF and better scale + lower spending on technology in the future will significantly boost that number.

 

However I saw that in the first quarter 2014 accounts receivable grew by $22 mln which significantly impairs OCF. For 2013 that number looked better, but in 2012 it was another $40 mln.

 

So basically from the end of 2011 until now accounts receivable went from $48 mln to $122 mln grwoing much faster than revenue.

 

Does anyone have an explanation for that?

 

[PatientCheetah]

Ocwen:

 

-Ocwen is inherently a big bet on prepayment risk.  Prepayment risk is kind of bizarre in my opinion and is affected by a large number of factors.  Because the prepayment risk has been going down, Ocwen's intrinsic value has gone up a lot.

-When Ocwen initially buys a MSR portfolio, it has a lot of costs in boarding the loans underlying the MSRs onto its technology platform.  It also needs to hire people.  After these initial costs are dealt with, the MSR portfolio starts throwing off more cash.

 

-Ocwen owns a lot of agency MSRs.  On these MSRs, they are able to sell OASIS notes which try to push prepayment risk onto the OASIS noteholders.

-The reason why Ocwen wants to get rid of prepayment risk is because they need to hold capital in case prepayments spike.  If the economy tanks, Ocwen could end up in a nightmare scenario where prepayments spike due to people losing their jobs and the government lowering interest rates and the cost of servicing going up due to foreclosures.  If they didn't have to deal with prepayment risk, they could use their capital for things that have higher returns (e.g. exploiting Ocwen's cost advantage in servicing mortgages).

 

I haven't learned how to value Ocwen's MSR portfolio.

 

Altisource:

-Mostly fee-based, doesn't have a lot of risky assets on its balance sheet.  It has lots of debt now, which is a source of risk/leverage.

-A hodgepodge of businesses, though the majority of its revenues come from Ocwen.

-Earnings slightly obscured by amortization of intangible assets from Equator acquisition

-Earnings slightly obscured by interest payments.

-Earnings slightly obscured by Equator and Hubzu being development-stage companies.

-Financial services segment not doing that great.  Altisource does some debt collection... that business is mediocre compared to the rest of Altisource.  I don't believe that they own consumer debt (like ASFI and ASFI's competitors); they just try to collect on the debt on a "contingency fee basis".

-The highly profitable default services segment is expected to see its revenues decline in the future as the levels of foreclosures die down.

 

To value a MSR portfolio, I think you need to run very granular monte carlo based simulations that model prepayment risk and interest rate curves. I doubt the filings will have enough information (zip code level data).

[jay21]

Ocwen:

 

-Ocwen is inherently a big bet on prepayment risk.  Prepayment risk is kind of bizarre in my opinion and is affected by a large number of factors.  Because the prepayment risk has been going down, Ocwen's intrinsic value has gone up a lot.

-When Ocwen initially buys a MSR portfolio, it has a lot of costs in boarding the loans underlying the MSRs onto its technology platform.  It also needs to hire people.  After these initial costs are dealt with, the MSR portfolio starts throwing off more cash.

 

-Ocwen owns a lot of agency MSRs.  On these MSRs, they are able to sell OASIS notes which try to push prepayment risk onto the OASIS noteholders.

-The reason why Ocwen wants to get rid of prepayment risk is because they need to hold capital in case prepayments spike.  If the economy tanks, Ocwen could end up in a nightmare scenario where prepayments spike due to people losing their jobs and the government lowering interest rates and the cost of servicing going up due to foreclosures.  If they didn't have to deal with prepayment risk, they could use their capital for things that have higher returns (e.g. exploiting Ocwen's cost advantage in servicing mortgages).

 

I haven't learned how to value Ocwen's MSR portfolio.

 

Altisource:

-Mostly fee-based, doesn't have a lot of risky assets on its balance sheet.  It has lots of debt now, which is a source of risk/leverage.

-A hodgepodge of businesses, though the majority of its revenues come from Ocwen.

-Earnings slightly obscured by amortization of intangible assets from Equator acquisition

-Earnings slightly obscured by interest payments.

-Earnings slightly obscured by Equator and Hubzu being development-stage companies.

-Financial services segment not doing that great.  Altisource does some debt collection... that business is mediocre compared to the rest of Altisource.  I don't believe that they own consumer debt (like ASFI and ASFI's competitors); they just try to collect on the debt on a "contingency fee basis".

-The highly profitable default services segment is expected to see its revenues decline in the future as the levels of foreclosures die down.

 

To value a MSR portfolio, I think you need to run very granular monte carlo based simulations that model prepayment risk and interest rate curves. I doubt the filings will have enough information (zip code level data).

 

Definitely not.  MSRs are near identical to fixed IOs and there are transactions of MSRs.  Valuation should be somewhat straightforward as there is some market activity.

 

As I noted, Ocwen has broker quotes on their MSRs, which gets me comfortable.  I can understand if it doesn't get anyone else comfort.able

[yadayada]

They seem to have 3 income sources,

 

Mortgage services (default falls under this)

income (latest 10q):

54m$

 

Financial services

5m$

Tech services

3m$

 

As Valuetrap mentioned, default services could dry up in the future, and that is a huge contribution (and source of growth) right now (falls under mortgage services).

 

BUT default services is only a small % of mortgage services, and despite fast growing revenue is already shrinking. Asset management, Insurance and residential property valuation seems to make them the most money here. Probably 50%+? This is also growing very fast. Any ideas where that could be in the future?

 

Seems title insurance is v attractive, and asset management falls under Hubzu, which also seems v promising. Not sure what to think of property valuation.

 

And valuation of this stock seems extremly attractive at 9-11x FCF. Very likely there is a nice growth runway and moat here.

 

Im suprised how little income their technology adds tho. That is why I got interested in the first place.

[jay21]

They seem to have 3 income sources,

 

Mortgage services (default falls under this)

income (latest 10q):

54m$

 

Financial services

5m$

Tech services

3m$

 

As Valuetrap mentioned, default services could dry up in the future, and that is a huge contribution (and source of growth) right now (falls under mortgage services).

 

BUT default services is only a small % of mortgage services, and despite fast growing revenue is already shrinking. Asset management, Insurance and residential property valuation seems to make them the most money here. Probably 50%+? This is also growing very fast. Any ideas where that could be in the future?

 

Seems title insurance is v attractive, and asset management falls under Hubzu, which also seems v promising. Not sure what to think of property valuation.

 

And valuation of this stock seems extremly attractive at 9-11x FCF. Very likely there is a nice growth runway and moat here.

 

Im suprised how little income their technology adds tho. That is why I got interested in the first place.

 

I think you have to be careful about how you label each category in the service business as even though it may fall under asset management it may be correlated with Ocwen and delinquencies.  I would highly recommend reviewing the 2 scenarios that ASPS reviews in their presentations.  They are going to absolutely knock the ball at of the park when originations come back AND Ocwen gets a few more transfers.  If only one of these happens, they should do merely very good.

[yadayada]

yeah what I hate about this one is the amount of hate I read on Hubzu and ocwen. I cannot find nearly the same hate for other servicers and auction platforms.

 

BUT if you look at the stats:

http://ify.valuewalk.com/wp-content/uploads/2014/03/tRW7I9h.png

 

You see that they have a v high % of bad loans they service (because Ocwen is good at that). So naturally they will have more complaints as these segments generate a lot more complaints then loans without problems. And by the numbers, Ocwen actually does very well. And it seems that the news is classically misreading the statistics here.

 

If you look at Q1 2014, you see that related party revenue % is dropping pretty fast compared to last years and the years prior.

 

The second reason people dont like this is because they think banks will not sell more MSR's. But the deliquency rates of overal MSR market still seems way above average. And banks absolutely hate servicing these loans. Also origination market is not doing that well, especially for subprime loans. This market is almost non existant at the moment because banks only want the safe loans at the moment. This probably has to do with regulations, and the fact that they still have shit loads of Delinquent MSR's on the books they need to get rid off?

 

Also looking at growth in market share, Ocwen's market share has been growing a lot faster then other non banks. They are by far the best positioned to take on more of these things. They have the least amount of leverage and the lowest costs.

 

It does hang a lot on Ocwen tho.

 

I bought some 2016 ocwen calls. There is good liquidty in the 30$ ones and they cost about 12$. So there seems little downside there, and a decent amount of upside (plus near term catalyst)  if things pick up again and that regular backs off. Even if they dont buy much new MSR's, then downside should not even be 100% here for the calls.

[jay21]

Still trying to get a handle on the company:

 

"It really has changed in terms of why people do it. Over the past couple of years, and historically, we've seen people expand outsourcing based on how much business they can do. It was a lever point," says Jeff McGuiness, CEO of the Lenders One mortgage cooperative, a group which has a fulfillment services arm. "However, most recently it really has been done to make sure all compliance components are administered as efficiently as possible to control cost variables."

 

"We see a lot of folks pulling things like underwriting back in-house, but anything that is…a commodity is outsourced," says Deb Aydelotte, president of Lenders One affiliate Altisource Fulfillment Operations (parent company Altisource Portfolio Solutions also owns Lenders One).

 

http://www.nationalmortgagenews.com/dailybriefing/tight-margins-and-reg-changes-prompt-new-interest-in-outsourcing-1041152-1.html

 

Specifically McGuiness said, Lenders One asked if the members are ready for the changes in regulations and are they doing the origination process as efficiently as they can?

 

For the latter question, it is focusing helping members understand what the true cost to originate a loan is and how it will shift when they no longer control the closing date on 70% of their pipeline (this is because, unlike refinancings, purchase transactions typically have a contracted closing date).

 

It introduced a member saving model, which shows them every single operating line item they need to run their business and how they can optimize the cost of each of those items, he said.

 

“It helps them in their vendor selection process; it helps them to make the decision whether they want to outsource certain components of their business and it also helps them determine where the peak efficiency is for them,” McGuiness said.

 

Lenders One was established in the first place to help mortgage originators execute better, including getting a better secondary market price for their loans. That still holds true today, he said. It is like a three legged stool, he continued. Lenders One will help members earn more money; save money (through the preferred partner arrangement) and it will be their advocate.

 

But like any good three-legged stool, depending on the environment, one is leaning a little more on one leg than the other two, he declared.

 

While much of the focus in the past has been on that first leg, the one that gets better pricing from investors, now members have to focus on the second leg, cost to produce a loan.

 

Lenders One ascertained the needs of its members and went out and sought solutions. “Between our vendor partners and our members, they sorted out the world and did a tremendous amount of business with each other, with value going both ways,” McGuiness noted.

 

http://www.nationalmortgagenews.com/origination/Jeff-McGuiness-Originators-Increasing-Complexities-1038252-1.html

[jay21]

Here's how Hubzu works:

 

Let me explain. We have an Ocwen-assisted short sale program. When their borrower or their broker approach Ocwen to approve a short sale, Ocwen wants to make sure that there's the appropriate price discovery that took place, that is being sold for a fair price. Only if the home sells for more money than what's originally proposed, after taking it into consideration, it has about -- there has to be more proceeds to the investor of the home before we earn $0.01 at Altisource. So if the home -- and what we're finding is 50% of the time, when a home comes to Hubzu under the Assisted Short Sale program, the house sells for money. And that more money, for those homes that sell for more, is about $17,000 more per home to the investor. We only earn money on those houses that sell for more money. And we're only earning a buyers premium, we don't take anything today from the listing agent. The listing agent's commission remains exactly the same.

 

http://seekingalpha.com/article/2167043-altisource-portfolio-solutions-s-a-management-discusses-q1-2014-results-earnings-call-transcript?page=6&p=qanda&l=last

 

 

[jay21]

News on the other Altisource vehicles:

 

What: Shares of Altisource Residential (NYSE: RESI  ) have stabilized at a loss of roughly 7% in afternoon trading after bottoming out at an 11% plunge shortly after lunchtime. The drop occurred after Altisource lost out on a Department of Housing and Urban Development auction for $3.9 billion worth of nonperforming home loans. Altisource's portfolio manager, Altisource Asset Management  (NYSEMKT: AAMC  ) , was hit far harder, and has lost nearly a quarter of its value today.

 

So what: Bloomberg reported that 27 investors submitted a total of 163 bids for this block of loans. However, this was the first time that a single bidder -- private equity firm Lone Star Funds -- won the entire pool, which it accomplished by submitting very aggressive bids worth roughly 78% of the current price of the mortgaged homes on the block. This is quite a bit above the 69% range in which Altisource had won earlier bids on nonperforming home loans.

 

Now what: Altisource's business revolves around acquiring precisely this type of loan, but it's unlikely that it would have acquired even half of the loans had it won its bids, since its balance sheet currently records only $1.77 billion worth of mortgage loans. While this bid represents a spike in bid values relative to earlier auctions, it could very well be an outlier, as there are typically multiple winning bids. While such bids have risen relative to home values over the past two years, they were still a fair bit below what Lone Star offered in the latest auction.

 

There will be other auctions later this year, and Altisource still has plenty of chances to get better deals than Lone Star got today. It hardly seems right to panic when the bad-loan supply is plentiful. In fact, since Altisource Residential is already up nearly 75% over the past year despite boasting a P/E below 12, this might be better viewed as an income investor's buying opportunity.

 

http://www.fool.com/investing/general/2014/06/23/why-altisource-residential-corp-shares-need-repair.aspx

[Scudbucket]

Can someone explain how that news impacts ASPS?  Thanks.

[yadayada]

i think it is because they are all connected. Due to that regulator, not much new loans are coming in for OCN to process. And these guys make money off OCN with their services. But looking at Q1 that number is rapidly declining (the related party revenue % that is).

 

I think key here is growth + share buy backs + all kinds of optionality that is not very related to bad-loan market.

 

I think market also worries that there is not much supply of new loans left.

[jay21]

Can someone explain how that news impacts ASPS?  Thanks.

 

It doesn't too much.  ASPS gets some revenue from providing rental services to RESI. Theoretically, an increase in potential rentals (NPLs) should boost revenue.

 

The bigger driver of revenue will be MSR transfers.

[yadayada]

jay:

Still trying to get a handle on the company:

thoughts now on ASPS?

[jay21]

jay:

Still trying to get a handle on the company:

thoughts now on ASPS?

 

Obviously this is all my opinion, but I think there are many ways to win in this.  The current price implies > 5% FCF yield, which is not too expensive to me given the rate environment.  Then here some of the opportunities available:

 

- MSR transfers - these could instantly grow earnings by sizable double digit rates for a few more years

- Originations - they are growing earnings despite a poor origination market.  If the market comes back, they will grow even faster.  I think the excerpts I posted earlier show you how they are solving the problem of increased regulation for smaller originators and the value proposition they offer.  Also, Ocwen's increased origination capabilities drive recapture of MSRs, mitigating the shrinking ice cube fear of MSRs.

- Improving economy - fewer delinquencies drive margins higher, but probably partially offset by higher refi's (hence the importance of getting a portion of the origination market)

- Hubzu - I think they will spin this out.  It will be interesting to see how much brokerage revenue they are getting from it.

- Return of the non-prime market - I think Ocwen is situated nicely for a return of the non-prime market, which means more high touch assets in the market and more revenue sources for ASPS.

- Management - Erbey seems to have done a great job creating value after the financial crisis.  The mortgage market is still changing and evolving.  I think that is good for an entrepreneurial management team (more opportunities).

 

I can't remember if I posted it in this thread or the OCN one, but if they execute on originations they will do well.  If they get some more MSRs, they will do well.  If both happen, they should hit a home run.

 

Disclosure: I haven't bought this yet (I'm long OCN), but I plan on doing so soon.

[yadayada]

thanks, would also like to add share buybacks. Buying back like 20% of shares over the next few years (if it stays cheap) could greatly add to all that too.e

 

They can basicly grow revenue like 30% and still return most of their net income to investors due to high ROIC.

[wbr]

 

- Improving economy - fewer delinquencies drive margins higher, but probably partially offset by higher refi's (hence the importance of getting a portion of the origination market)

 

 

Fewer delinquencies = bad for ASPS = good for OCN (OCN has to pay for delinquency services which creates revenues for ASPS). Also refinancing activity is primarily a function of interest rates so a lot of it has already happened. When the economy improves and rates rise you can expect these mortgages (and thus the MSR's) to last a very long time, which is very good for OCN and ASPS.

[jay21]

 

- Improving economy - fewer delinquencies drive margins higher, but probably partially offset by higher refi's (hence the importance of getting a portion of the origination market)

 

 

Fewer delinquencies = bad for ASPS = good for OCN (OCN has to pay for delinquency services which creates revenues for ASPS). Also refinancing activity is primarily a function of interest rates so a lot of it has already happened. When the economy improves and rates rise you can expect these mortgages (and thus the MSR's) to last a very long time, which is very good for OCN and ASPS.

 

You're right on the first part.  My mistake.  Have to remember to keep the two separate in my head.

 

I partially disagree with your second part and it's probably a minority view (I agree that rates can dampen originations).  I think that an improving economy will lead to a more normal housing and origination market.  Home ownership rates will start increasing again, people will start moving for new job opportunities, there could be some cash out refi activity if HPA continues, the non-prime market will come back, etc.  We are probably at a bottom now in non-delinquent mortgages' CPRs.

[buylowersellhigh]

 

- Improving economy - fewer delinquencies drive margins higher, but probably partially offset by higher refi's (hence the importance of getting a portion of the origination market)

 

 

Fewer delinquencies = bad for ASPS = good for OCN (OCN has to pay for delinquency services which creates revenues for ASPS). Also refinancing activity is primarily a function of interest rates so a lot of it has already happened. When the economy improves and rates rise you can expect these mortgages (and thus the MSR's) to last a very long time, which is very good for OCN and ASPS.

 

You're right on the first part.  My mistake.  Have to remember to keep the two separate in my head.

 

I partially disagree with your second part and it's probably a minority view (I agree that rates can dampen originations).  I think that an improving economy will lead to a more normal housing and origination market.  Home ownership rates will start increasing again, people will start moving for new job opportunities, there could be some cash out refi activity if HPA continues, the non-prime market will come back, etc.  We are probably at a bottom now in non-delinquent mortgages' CPRs.

 

Is there a consensus on the board as to which are the best non-bank mortgage servicers?  OCN, ASPS, WAC?

 

Which of the stocks are attractively priced? 

[Scudbucket]

The guys at Goodhaven like WAC, but they own OCN, too.  No ASPS.