Altisource Portfolio Solutions SA Q3 FY2024 earnings call

• We had another solid quarter, demonstrating resilience in a challenging market. Service revenue grew both sequentially and year-over-year.
• Generated $38.2 million in service revenue for the quarter, a $4 million or 11.8% increase over the same period last year.
• Adjusted EBITDA for the quarter was $3.6 million, a $2.8 million improvement over the third quarter of 2023 but an $800,000 decline compared to last quarter.
• Service revenue for the first nine months of this year is $7.5 million higher than last year and adjusted EBITDA is $13.8 million higher.
• For the servicer and real estate segment, grew service revenue by 4.7% sequentially and 13% over last year, but adjusted EBITDA was roughly flat to last year and 10.6% lower than the second quarter. The renovation business has received over 70 referrals since late April launch.
• For the origination segment, continued to make progress improving performance with adjusted EBITDA and margins improving relative to prior year and last quarter, and won new business with annualized stabilized new business of $4.9 million.
• Corporate segment maintained strong cost discipline with third quarter corporate adjusted EBITDA loss better than 2023 third quarter and flat to 2024 second quarter.

Servicer and Real Estate segment

• For the quarter, service revenue grew by 4.7% sequentially and 13% over last year. Adjusted EBITDA of $9.9 million was roughly flat to last year and 10.6% lower than the second quarter of this year. Since late April launch of renovation business, received over 70 referrals with average renovation cost close to $100,000 per property.

Origination segment

• Compared to the third quarter of last year, adjusted EBITDA improved by $1.4 million on $500,000 of service revenue growth, primarily from cost savings and efficiency initiatives. Compared to the second quarter, adjusted EBITDA improved by $400,000 on similar service revenue, primarily from the reversal of bad debt expense and lower professional services expense. On an annualized stabilized basis, won an estimated $4.9 million in new business in the third quarter, with weighted average sales pipeline at end of quarter $12.6 million.

Corporate segment

• Third quarter corporate adjusted EBITDA loss of $7.2 million was $1.5 million or 17% better than the third quarter of 2023 and roughly flat to the second quarter of this year. The lower corporate adjusted EBITDA loss compared to last year reflects cost savings and efficiency initiatives.

• Anticipate strong service revenue and adjusted EBITDA growth over 2023 for fourth quarter and full year, but forecasting close to low end of guidance.
• Primarily driven by three factors: 1) Guidance assumed modest increase in foreclosure starts and sales compared to 2023, but actual starts and sales have been lower year to date, negatively impacting higher margin Hubzu, trustee and title businesses. 2) Renovation business guidance assumed earlier launch and ramp than actual. 3) Legacy indemnity claims and bad debt expense were higher through the third quarter than anticipated.

• Continuing impacts of government and servicer responses to COVID-19, governmental fiscal policies and current economic conditions make it difficult to predict future state of economy and industries, and potential impact on Altisource.
• Market not performing as well as expected, with foreclosure starts and sales significantly lower year to date, impacting higher margin businesses.
• Renovation business ramped later than planned, impacting guidance.
• Legacy indemnity claims and bad debt expense higher than anticipated, impacting adjusted EBITDA.

Q: Hi, good morning. Thank you for taking my questions. I wanted to understand you had talked a lot about the pre-foreclosure work and the loss mitigation work, the earlier part of the foreclosure process that you guys would do more of that work. Is that -- when you say that the renovations business is included in that pre-foreclosure work and what percentage of total revenues is that now as opposed to last year? And then, I have a follow-on question.

A: Hi, good morning, Raj. I think, let me take a step back. I think what we're seeing is, overall the market is not performing as well as we had expected it to perform this year. I think we modeled in our guidance a very modest increase in foreclosure starts and sales and what we're seeing in the reality is that, foreclosure starts and sales are actually significantly lower for the year to date this year. Compared to last year, it didn't have as much of an impact on us earlier in the year, because we already had the inventory in place, but as you got to the third quarter, the inventory, particularly the REO inventory from Ocwen is lower than where it was and that's impacting the number of units we've sold. Sales prices have held up and that had a pretty meaningful impact on us in the third quarter. We are having a success in adding new clients to some of the earlier-stage processes. We've added two or three new trustee customers, and we've also done a decent job adding more REO customers. Some came last year and another one is beginning to ramp up their referrals to us in the third quarter. So I think where we're sitting right now from an inventory perspective is, our Ocwen REO inventory is down compared to this period last year on REO, but our foreclosure inventory for both Ocwen as well as non-Ocwen customers is increasing a decent amount compared to this time last year and our REO inventory with non-Ocwen customers is also increasing. So sales is helping us offset some of the market, but the market is having an impact overall on the business, and it impacted our quarter quite meaningfully.

Q: Great. Could you talk a little bit about this renovations business? Again, just to remind us what it entails and is becoming the largest part of your business?

A: Sure. So, in the fourth quarter of last year, we signed an agreement to provide renovation services for one of the largest owners of REO assets in the US. I think we got our first referrals in April, or late April of 2024, and I think probably through yesterday, we're probably well into 75, 80 referrals that we've received so far that are revenue generating and each home that we renovate, we believe will generate close to $100,000 of revenue, that's roughly the renovation cost and it takes time once you receive a referral to submit your bid for the work, get the bid approved and then start the work. And then, once we start the work, we're paid interim payments as we go. And so, we're pretty excited about the business. It's ramped quite nicely. Michelle, correct me if I'm wrong, but I think we did about $1.5 million in revenue in the third quarter, up from just a couple of $100,000 in the second quarter. Is that right? Michelle Esterman: That's right, $1.5 million. Bill Shepro: And we anticipate that's going to ramp quite nicely going into the fourth quarter. As we mentioned in my prepared remarks, we are just signing up another renovation customer that we think will start sending referrals in the first quarter, and that's a business that we're going to very actively market to others going into the end of this year and into next year.

Q: Got it. And then just you mentioned the $1.8 million higher SG&A. Can you talk about that again and also the legacy indemnity claim and the bad debt expense, please?

A: Yes. I think there are three things. If we compare it, maybe not to last year, but to what we anticipated was going to happen for this year. I think the impact from the market and perhaps a little bit of a slower ramp of some of our default related-services in the quarter cost us about $2 million of EBITDA and that's primarily impacting Hubzu, the trustee and the title business on the default side. I think the slower ramp of the renovation business compared to our plan, I think, we started a couple of months later than we expected that probably cost us about $0.5 million of EBITDA. And then the higher SG&A, which is comprised of both professional services and bad debt, that's another about $350,000. So in total, it probably cost us about $3 million in the quarter compared to what we expected to do. So the bad debt, there was one customer in particular, we think it's ultimately going to be collectible to the smaller customer that expected to pay us and then didn't. We think will get paid in the subsequent quarters. Not exactly sure when, but we think it's collectible. And then, from a legal fees perspective, there's some legacy matters going back several years, and we just happen to have some higher legal and indemnification expenses this quarter than we expected.

Q: Hi. I just wanted to, hop on again and ask your views on the foreclosure market and the delinquencies. I mean, are you seeing any change in the fundamental upside, the potential of this business or how it's progressing, or do you think it has impacted the run rate, if we ever got back to the pre-COVID level of foreclosures? Has anything changed in your outlook before this?

A: No. Look, I mean, I don't think any of us would ever have guessed that, the level of foreclosure initiations and sales would be where they are today coming out of the pandemic. I do think there are some we didn't talk about it in my prepared remarks. I do think there's some early signs. I mean, yesterday, a report came out that on a seasonally-adjusted basis, the annualized home sales look like they're going to be at a 29 year low this year. I think homes available for sale, the inventories increased compared to last year by over 20%. This usually is a good leading indicator to prices coming down and if you think about those more recent cohorts of originations, that have they may be impacted by home prices coming down, less equity, and then interest rates are staying stubbornly high and so, that could drive delinquency rates higher. I think as we talked about in the prepared remarks, the average serious down this year compared to last year and compared to pre-pandemic. I don't think this lasts forever, and I do think the market ultimately turns, but we need to continue to make sure, we're in a position to benefit from it turns, when it turns, but also work to diversify our revenue as we wait. So I think overall, Mike, we haven't seen it turn yet. In fact, it's gone a little bit the other direction, but I think everything is cyclical and in time, the default market will get more back to normal. It just hasn't happened yet.

Q: And in terms of the pre-foreclosure work and the loss mitigation work, are you doing more of it now and has your share gone up versus last year?

A: Yes. I think we've won. I think on the trustee side, we and on the title side, we've won 3 or so new customers, decent-sized loan servicers. We've also grabbed some more market share from our existing customers on some of the pre-foreclosure work that's helped us offset some of the market decline and we continue to have, as you saw in our sales slide, a decent pipeline on a weighted-average basis of prospects. Look, there's not it's kind of hand-to-hand combat from a sales perspective. We're a really strong performer. We're doing well on the scorecards, and we think that's going to help us grab share with existing clients and win new business, but there's just not a ton of new business out there to grab right now.

Q: Hi, guys. Thanks. Hey, Bill, thinking about the renovation business, any rough base case what revenues could look like in '25? And then any insight on, I don't know, adjusted EBITDA margin in the business, or is this kind of a cost plus business? And then a follow-up, but go ahead.

A: Yes. So, we're still going through our planning process for next year, and so we haven't finalized that. I do think, look, if you get 15 referrals a month on an average renovation cost of $100,000 you're looking at $1.5 million of revenue a month. If you get 30 referrals a month from that client, you're looking at $3 million a month of revenue on a stabilized basis, once your inflows and outflows are roughly the same. And so, I think it's a tough business to model. We get some guidance from our customer, but it's only guidance and it doesn't necessarily turn out the way they expected. So we're very optimistic, it's going to be a meaningful contributor next year, but it's hard to estimate exactly where it's going to be at this point. From a margin perspective, if you think about construction managers in the space, they're making after their corporate costs, which typically they're paid for separately, 10% to 15% type margins, maybe as high as 20% for some of them. And so we hope we'll be on the higher end of that side.

Q: Got it. And then just two follow-ups. Do you have the capacity for, I mean, 15-a-month seems like you do if you already got 75, 80 referrals, but 15 to 30, do you have the capacity to handle that. And then, maybe what's your risk if you take a referral, build out, what if it costs more, what if there's overage? Could you kind of address what ASPS risks are in this business?

A: Sure. We think we've got a pretty good handle on the risks and are able to mitigate those, Mike. But, if you think about the risk, we submit a bid, it's approved. And, if we underestimate what it's going to cost for the work that was approved, we take that risk of overage. The flip side though is, if you underestimate the cost because you open up a wall and you found mold, that's a change order and you can submit that to a client and then you get paid for that change order. And so,我think we do a very good job on the upfront work, understanding the scope and what it's going to cost us to complete the work and to make an attractive margin on that work for the bid we've submitted and if it turns out there's items that we could not have expected or there's change orders or additional work requirements from our clients, then we can charge for that additional work. So, I think we've got a good handle on it and can manage the risk.

Q: Got it. And the capacity?

A: Yes, good. Thank you. From a capacity perspective, we feel very good as well. We have we're operating primarily today in six states with a few stragglers in some other states, and we have regional managers in each of those states that are overseeing the programs and a pipeline of additional regional managers should we need them in those markets or new markets. We feel good about them, very good about capacity. And then, a lot of the back office work, we've got the infrastructure in place.