Altisource Asset Management Corporation (AMEX:AAMC) Q4 2022 Earnings Call Transcript

Altisource Asset Management Corporation (AMEX:AAMC) Q4 2022 Earnings Call Transcript March 23, 2023

Operator: Good day, and welcome to the AAMC Investor Call. Today’s call is being recorded. At this time, I would like to turn the call over to Danya Sawyer. Please go ahead.

Danya Sawyer: Good morning, everyone, and welcome to AAMC’s Q4 and 2022 Annual Earnings Conference Call. I’m Danya Sawyer, the new Chief Operating Officer of Lending Operations at AAMC. Before we begin, let me remind you that today’s press release, and the presentations made by our executives may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release, and in our filings with the Securities and Exchange Commission. Consequently, you should not rely on these forward-looking statements as predictions of future events.

Statements made during this conference call are made as of today’s date and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. As previously mentioned, today’s call is being recorded and a link to this webcast will be posted to our website later today. With that, joining me for today’s call is our Chief Executive Officer Jason Kopcak. Jason will provide an update on our fourth quarter and full year 2022 activity, review additional corporate developments, and present an overview of our outlook for the year ahead. We will then open the line for questions. Lastly, materials for this call can be found in our investor presentation, which was issued earlier this morning.

Related information can also be found on the stockholders page of our website at www.altisource amc.com. And now I’ll turn it over to Jason.

Jason Kopcak: Thank you, Danya. Danya as mentioned, is the new Chief Operating Officer of our Alternative Lending Group. We are extremely happy to have her on our team. She started her career at Countrywide, and she brings over 20 years of experience across the mortgage and alternative asset industry. She will be instrumental in helping us to execute transactions across all origination channels, and manage relationships with institutional buyers. Also joining me in this meeting is Steve Krallman, our Chief Financial Officer. Turning to our Q4 financial performance at a high level is as follows; for the fourth quarter, AAMC generated a loss of $4.1 million on revenue of $2.5 million. I would like to highlight several factors here.

One, revenue improved relative to Q3 by increasing of 600,000 or 33%. Secondly, Q4 included roughly $1.1 million of legal charges, branding, expenses and other items we considered to be non-recurring, three, eliminating these special items and adjusted Q4 loss of $3 million was less than the $4 million from that we realized in Q3. Our strategy which is unique in the industry is that we are capital light originator of private credit products. These products include both short duration, high yielding fixed income assets, secured by one to four single family residential or multifamily residential properties going through value improvements, also known as residential transitional loans or RTLs as well as long duration interest only secured by income producing residential properties also known as DSCR loans.

Such products are distributed to institutions with permanent capital such as insurance companies, pension funds and endowments. I have 15 years of unique experience relationships with these institutions. Unlike our peers, we do not use loan securitizations as an exit for our loans. Instead, we establish individual criteria, or a Buy Box to sell loans to insurance companies or other funds that are backed by endowments and pension funds. These institutions have large stable cash that needs to be invested in fixed income products. We then go to market to originate these loans via our three channels, direct a borrower wholesale, broker direct channel. Back end purchasers must be in place before we can ramp up our origination platform. I’ve seen in recent weeks, companies with permanent capital, such as insurance companies are at a premium unlike banks and firms that depend on the securitization market.

Insurance companies do not have the infrastructure to originate private credit products. Therefore, they look to partner with firms such as ourselves. Insurance companies, pension funds and endowments have potentially over a trillion dollars allocated to be invested in alternative fixed income assets. Alternative fixed income assets such as ours are an attractive investment opportunities, there’s constantly resetting to the market. The typical metrics include; shorter duration originations with a range of 10.5% to 12% gross weighted average coupon or whack with a one a two year term. These assets do not have the same interest rate risks, such as those that banks typically deal with government and agency mortgage portfolios, long duration, very low yields.

As a reminder, the underlying collateral short duration notes collateralized by one to four single family or multifamily residential properties that are going through value improvements. Turning to our accomplishments. In Q4, we closed in our second warehouse $50 million warehouse line. We closed our first four takeout with a $55 billion plus money manager that owns an insurance company. We won an arbitration hearing against our former CEO with a judgment of $1.6 million plus unpaid interest. Turning to our Q1 2023 goals and operating standards. Our expected gross revenue per loan for RTLs is a range between 300 basis points to as high as 450 basis points. Our term or DSCR loans have a range between 200 basis points and 350 basis points. The above ranges reflect the all-in annualized revenue expected to be received from originating the loans consisting of origination fees, gain on sales and interest trips.

Our focus is originating as opposed to purchasing closed loans. We are expecting the cost of inquiry, I’m sorry, we’re respecting the costs of acquiring a client on the direct borrower channel to be around 1500 hours per client and over time is spread over multiple loans. I have certain historical experiences that we can improve cost to capture clients from 1500 to 800. Our expected cost to process a loan is $160 per file. This represents a significant competitive advantage due to having our loan production principally in Bangalore, India. Our expected average loan size for RTLs is approximately 500K. While the expected average loan size for DSCR term loans is 300K. As of March 20, we have a pipeline direct to borrower channel of origination of 35 million.

And we are in active negotiations with an additional 25 million on top of that 35 million. As for our wholesale channel, which had a soft rollout on Friday March 17, we have committed volume of 15 million. We plan to roll out a broker direct channel over the next three weeks. With that, I’ll turn the call back to the operator for questions.

Operator: Thank you. As we assemble the queue, I’ll turn the call over to Stephen Krallman for pre submitted questions.

Stephen Krallman: Thank you, Katie. First question we have what if any impact have we felt or could we be exposed to in light of the recent crisis of confidence in the U.S. regional banking sector?

Jason Kopcak: That’s a great question, Steve. And in this environment which we’ve filled that question many times, so we haven’t experienced any issues. We have, our takeoff partners, our permanent capital providers that are not affected by the short term fluctuations in the capital markets. Our capital partners, partners are not dependent upon unstable deposits or the securitization market. That’s the beauty of our business model. Furthermore, it’s more clear than ever that our product is a hedge. Our product is short duration, high yield, and underlying collateral is improving over the duration of the loan. The natural has been a rising rate environment, unlike the low yield, long duration agency mortgages that are causing banks to be under severe stress if they’re not perfectly hedged. Second

Stephen Krallman: Yes, we have one additional question. Have we lost access to any lines of credit that we had previously negotiated for?

Jason Kopcak: No, it actually, Flagstar, who’s owned by New York Community Bank reached out to us about increasing our line. If you’ve seen the news in the News, New York Community Bank, which owns Flagstar acquired the deposits from Signature Bank, as well, some of the loan portfolio. New York Community Bank stock has materially ran up since the news of the acquisition of signatures deposits. So we feel very good with both our bank lenders. We’re all time providers.

Stephen Krallman: Thank you, Jason. Back to the operator for further questions via the phone request.

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Q&A Session

Operator: Thank you. We’ll take our first question from Jeff Moore with Burr Oak Capital.

Jeffrey Moore: Hey Jason, good presentation really helpful and whatnot. I was curious. My first question is, how how’s the stock repurchase plan coming?

Jason Kopcak: So we purchased about 1.2 million in stock repurchases that information will be in our 10K filing out on Monday.

Jeffrey Moore: Okay, fantastic. Okay, and then given the kind of progress with the business and whatnot, I do want to ask a little bit about the pipeline that you had laid out. When you’re talking about that 35 million number what, can you give a little bit more clarity as to what that means? Because it sounds like you had 25 million that was like, kind of pot committed, those deals are going to close. But what’s even more clarity on that 35?

Jason Kopcak: No, absolutely. So that’s a great question, Jeff. So when you look at 35 million, what we’re saying is we have borrowers who have moved forward signed term sheets, we’ve ordered appraisals that didn’t process headed towards a closing. So we just turned on our marketing. We have 35 million committed directed borrower. We are behind that. We’re in talks with another between 25 and 40 millions of prospects who are interested in doing acquiring loans, or getting rehab loans from us. So we just recently turned on our originations and was sitting around 50 million to 60 million in direct originations. So that’s, that’s where we’re at. It’s just a different stage of the process. So that’s, that’s the difference between 35 and 25. 35 committed by the borrowers, and then 25, we’re in talks with.

Jeffrey Moore: And then you’ve got another 15 in wholesales. So the quick math yes, it would be.

Jason Kopcak: It’s a great question. Go ahead, Jeff.

Jeffrey Moore: We’ll see you get, you get 50% of the 25 million that’s in process that let’s just call that 15 million. So you’re basically, in all likelihood going to be getting say $65 million in originations from kind of what’s in the pipeline now without really getting more marketing going, where your broker channel out. So the timeframe for closing one of these loans is probably what, 30 or 45 days.

Jason Kopcak: So I think what you’re saying is exactly, we just turned on originations, what we found is, we’re working with a pipeline of between 50 million and 60 million with just turning on to direct borrower originations. Obviously, as we smooth things out, we can increase our market penetration there. Wholesale, we rolled out what we call a soft rollout. We literally are getting calls every day from counterparties, who want to face us and want us to do underwriting. So right now, we literally turn it on with one counterparty. We have some 15 million in committed loans. We have probably another 7 to 8 that we’re going to roll out in the next two weeks counterparties. So what we’re trying to do in an organized fashion roll out the wholesale side, is frankly, we’re very confident between the calls we received the request received, there’s a tremendous amount of demand to face us on the wholesale side, which will obviously, the volume, we’re trying to, to manage it properly.