Altisource Asset Management Corporation. (NYSE:AAMC) Q2 2022 Earnings Conference Call March 23, 2023 9:30 AM ET

Company Participants

Danya Sawyer - Chief Operating Officer

Jason Kopcak - Chief Executive Officer

Stephen Krallman - Chief Financial Officer

Conference Call Participants

Jeffrey Moore - Burr Oak Capital

Matthew Howlett - B. Riley

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.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] 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.

Operator

Thank you. [Operator Instructions] 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.

Like for us to go out and just go hard and turn it on, we could cause some production problems. So we're trying to log into it. With that being said, with one Counterparty, we have 15 million submissions. We have another five to eight that we're going to turn live on in next two weeks. So we feel very good, that over the next three months, our wholesale or wholesale production is going to ramp quickly. Okay.

And then finally, we've done a lot of work around the broker channel. And we haven't turned that on yet. And we haven't started marketing directly to brokers in our space. Brokers are a very important part of the business. And we've incidentally work with brokers. But frankly, we haven't started to focus our marketing towards them, which we plan on doing over the next three to four weeks. And that's a third channel that we expect to see material volume coming in from origination.

So, if we're sitting at 50 million to 60 million directed borrower 15 million from a weeks, that one week being turned on any week, I'd say that's from like, three days. I think you can extrapolate the ramp should be pretty strong over the next 30 or next three months with our business.

Jeffrey Moore

Yes, I mean, it sounds like you'll probably be able to hit your since your $600 million goal this year and like on a run rate just absolutely destroy that. So given that when should we expect profitability for the company?

Jason Kopcak

Yes, look, I mean at the end of the day, I provided metrics, some framework to how we're looking at the cost infrastructure and the revenue side of it. I'm as eager as anybody is to turn a profit. I think it's most important for us to focus on our production as you your first question is around our production. So I'm very focused on getting all three channels live. I don't want to give a forward statement. But my interest is why align with shareholders getting it. We're looking to get in profit on a monthly basis as soon as possible. I don't think it's going to be terribly far.

Jeffrey Moore

Okay, so, so given the huge amount of loans that are not only coming your way, but seem to be once you kind of turn on the, the wholesale channel a little bit more and whatnot, and the broker channel. How are you going to be able to underwrite like all those loans that seems like a lot.

Jason Kopcak

So if we were pretty staff, we're staffed pretty well. We added a fair amount of staffing in September, October, November over in Bangalore. We have a great team there. So we can easily absorb and probably triple what we have right now. We, we'll have to add a couple processors or more processors, but frankly, we feel good that our current team can handle up towards 100 million 150 million a month, in the standard, maybe adding one processor. But there's a lot of there's a lot of slack out there and talent between Bangalore and here that we could hire pretty easily. So we've already we've been out looking at what's out there supply late of labor, and we feel very good that if we needed if the demand there, we can have the people on the challenge to process the loans. That's not a concern of ours.

Jeffrey Moore

Okay. And then what, what, what are the operating processes and stuff like for that? Like, what are some of the differences with having a really remote workforce? And how does that kind of play into you, and just how you guys are going about operating with the loan origination and whatnot?

Jason Kopcak

Yes, so that's, that's a great question. And looking at where I'm going to turn that over to Danya in a second. But just to be clear, I worked on the street. I worked at Morgan, Stanley, and Nomura. And we had offices all around the world, we have people working all across the countries around the world, and things move through pretty seamlessly. And the reason we brought Danya on board, because she's had a tremendous history in building out these platforms, as well as reviewing these platforms. So with that, I'd love love to let Danya answer that. Danya, are you here?

Danya Sawyer

I am. Yes. And Jeff thanks for the question. So as Jason kind of highlighted earlier in the call, we do have a pipeline that is in various stages at this point more heavily weighted in the earlier stages. And it's my job to make sure that we have the operational infrastructure that is required to facilitate that. So a lot of the work that we've been focusing on in recent weeks has been really development of documented guidelines, making sure that we're using standardized forms, making sure that we have automated processes to the extent possible. Some of the things to hit on specifically Jeff is we're trying to make it easier to process and underwrite these loans.

So while we have tremendous capabilities that are proprietary to our nature, and given the investor take outs and outlets that Jason has negotiated, we still need to create a scalable process. We can't look at every deal like a customer deal. And toward that end, we've created a lot of tools. So think about kind of a rudimentary automated underwriting system that's at this point in Excel based model at some point in the future, a web based form that not only can be used internally, by loan officers to more quickly identify whether or not they have qualified deals, but also externally facing to broker partners.

We're doing things like creating standardized forms for basic things, appraisal orders, title orders, just to make sure that these things are being processed in a consistent fashion, and that we're shaping up seconds, minutes, whatever it is, and internal processes so that we can scale more.

Additionally, I think we're trying to get ahead of things to eliminate duplicate processes for borrowers and broker partners. Obviously, there's a lot of touch points in the loan manufacturing process with external vendors that we have to coordinate with. We want to make sure that to the extent we have special endorsements on our construction products or state specific considerations, that we're making those requests of local titles earlier in the process, so that we don't run into 11th hour issues.

So in short, a lot of coordination with communication protocols, standardized operating procedures, automated tools, to the extent possible to make sure that not only can we process deals in a fashion that is in alignment with our credit risk standards, but that we can do so in an efficient manner and create those scalable workflows.

Jeffrey Moore

Wow, well, it sounds like you're definitely ahead of a lot of the local banks I use for loans on my property. So that's really good stuff to hear. Thanks Danya.

Danya Sawyer

No problem Jeff.

Jeffrey Moore

I've got some more questions, but I'll hop off and I'll circle back once if there's anyone else in the queue.

Operator

Thank you. We'll take our next question from Matthew Howlett with B. Riley.

Matthew Howlett

Thank you. Thanks, good morning, everybody. The capital, I really have a strong appreciation for the capital model that you were selling directly to the life insurance companies or the the big asset managers. I guess that's my question on. What's the outlook, you signed up? You said, you're a pretty big asset manager that owns the life insurance company? What are your conversations like with additional ads on that side? What do you -- what are you hearing? What’s the other typing tip enter?

Jason Kopcak

That's great, Matt. That's a great question. That's been a focus of ours. When we tested our, our proprietary lead generation in late Q3 and Q4 last year, we realized that we could ramp pretty easily. So it became paramount to add these forward flows. So with that being said, we're currently signed up with three passes four takeout partners. Three of the four partners have pockets of money for life, life insurance. We're in addition, we're talking probably another six to eight, I would say, three quarters of those are life companies, and another three to five money managers. On the insurance side, it can't get enough products. It just, we could originate 300 million a month, and it -- we couldn't sell the buckets.

So there's massive amounts of capital, they're under pressure to figure out different ways to deploy their capital into above market rates, getting away from the liquid agency market. And so there's tremendous amount of capital being raised in insurance companies. We see it, like, it's not a matter of, do they have enough balance sheet, they can't get that product. So it but it's a long process, when you sign up with insurance companies, they just don't sign up with anybody, they pick a handful of partners, and they work with those people because, they don't have the same infrastructure, they need to have a credible Counterparty, they need somebody who has the infrastructure has the resources to deliver quality products.

And with us having a long history, with our team in India with our management team here, we are a pretty solid model for, for these light codes to partner with. And so with that being said, we found that at the beginning a year, the life course [Ph] have a ton of capital, and the money managers are some of their voice and some that are sitting on the sidelines, so with the money managers.

Matthew Howlett

Did you think you're almost up to almost 10 counterparties? And would they have been what would the flow arrangements look like? I mean, were they would they, how big would they have been – did I hear you say you could, you could do 300 -- I mean, you said, demand is just sensational. So can you just give us a sense how big each of them could be?

Jason Kopcak

So let me step back a second. So we're in our standard with like a double check for sure. Three, if not four, counterparties. We're in talks, another seven, eight, okay. On the term side DSCR products, we could originate just under a term product, we could originate 200 million, 300 million month, and I still wouldn't be able to fill this the various insurance companies are talking to. So these insurance companies have a mandate to, and we're talking to each one of them, I can't even tell you, it's going to be in the 10s of -- it's going to be like, I would assume they haven't, they have a mandate to deploy 3 billion to 5 billion at least each in DSCR paper, if not more. And so with that being said about before, reaching 200 million a month, and that's 2 billion, and we distribute that the three different groups, that 700 million per an insurance company, it's a scratch in a bucket.

Okay, so typically, you don't have caps on how much you can sell to each insurance company. But an ideal world would become irrelevant, if you're selling a monthly basis 75 million to an insurance company, you become irrelevant to them. So for us, the target is to be selling 75 million at a clip a month to each insurance counterparty that we're dealing with. Like, we don't want to sell 5 million or 10 million because it doesn't, we're not we won't become relevant to them. So we have to quickly get to 75 million a month, because then we become very, we fit on a partner to these insurance companies.

So that's on that's on the term side. And then we look at the transitional side. Typically, it's similar, if you're going to sell the insurance companies you got to sell typically 50 to 75 million slugs in order to become irrelevant, so they're not going to look at you unless you get to that size. So with that, that's our strategies is to get in that kind of to get to that kind of level. We're capable of getting that kind of volume numbers. I think the kind of person we're talking to him or sign up with no, we can get there and that's why they signed up with us directly. So yes, that's hopefully that helps, Matt.

Matthew Howlett

Yes, it does. And thanks for clarifying that. It’s certainly great to hear about what you know what they're seeing on the other side. It's just that you can deliver them this this product. It's just an incredible model. And I guess that's my next question on the margins look like you went, they went up on the RTL last time you gave it to us. Just curious, what's driving that? And you'll get it to 350 margin. And then what long-term do you look at as sustainable for you?

Jason Kopcak

Look, I've been around the space a long time. And I've seen on the RTL side, on transitional loan side, I’ve seen margins rise 500, 600 points. So typically as the market has more involvement, so when there's more securitizations, and more players in the spread is actually wide now. So current in the current market, when there's a shake of this going on and what on last year in the securitization market, and this year’s score on the bank sector in the short run, it shakes out a lot that weak players, a lot of people who don't have good capital markets don't have good takeout partners just don't have the infrastructure to handle a tough environment.

So again, when we start able to originate 50 million 75 million month, that's the ability to deliver into insurance companies. With that being said, we've noticed there's a lack of liquidity. And when I say that to, borrowers just can't go to any shop now and close your loans, while the smaller to medium size players are getting shook and shook out. That's why a lot of these guys are coming to us, for us to fund wholesale wise. So with that being said, our spreads have widened our spreads have widened because we're a liquidity provider. We know that what we have is valuable. And so we've been able to exercise pricing control, because we are a liquidity provider. And we have capital and we have, good strong takeout partners that have permanent capital. So our spreads have widened, because we're not a price taker at this point in the market.

So that's why on the transitional loans, our spreads have widened. And so it's more about how much production can we do, we're really focused on trying to get a production up, because the fact of the matter is, we know that we're in a very positive, we have a competitive advantage on that side. On the DSCR side, same thing that, what we're seeing is there's an insatiable demand by insurance companies for a DSCR product as a whole, there's competition, but there's a lot of originators, who aren't structured properly. And so they're getting washed out.

So on a term side; we feel a bit a little bit more competition than we do on the RTL side. But the fact is the market shaken out people right now and it's just give us more pricing power. So that, I think we're positioned right. The markets turbulence lately is causing us to be in a position of strength. So that goes to saying that we're very much focused on our production. Our goal right now, we have the right counterparties in place, we're talking to other counterparties you're going to be value add. It's, it's simply this point, how much effort do we have to put in to get our production to where it needs to be? And we have those three channels. The channels, our director, borrower, wholesale, and then surely broker channel. So does it help Matt.

Matthew Howlett

Absolutely. Look incredible margins, nonetheless, and I really appreciate all the context switches.

Jason Kopcak

Thank you.

Operator

Thank you. And we'll take our next question from Jeff Moore, Burr Oak Capital.

Jeffrey Moore

How -- with rising rates, and a lot of the bank failures that are happening, how, how does that affect your model? And then if lending freezes up with banks? What do you think you'll be able to do with origination and sales. Do you, is this a better environment for you? Is it a worse environment? Kind of what are your general thoughts on that?

Jason Kopcak

Yes, look, great question. A similar one I mentioned to Matt. When the banks like right now we're going into a tough environment for banks, they have a tendency to lend less. So you'll see their lending pulls back. And so with that being said, that's a positive for us. The more that the peripheral banks pullback, the Street firms are in love with this space just because they don't quite understand it. So the fact that matters is there's less competition, it gives us more pricing power. This is a natural product. The insurance companies love the product; the insurance companies can't get enough of it. And frankly, I've had plenty conversations the insurance companies know they're in the driver's seat right now. They know it. And so to your -- to answer your question is in this environment it long-term it's very beneficial for us. This puts us it weeds out some of the weaker players. It allows us to take more market share, gives us more pricing power, and it allows us to build out our process. So it's it's a win win for us.

On the street, the one thing you learn, one thing I've learned over my 15 years and working on the street is volatility creates opportunity. At the end of the day, there are people who are heading for the sidelines. But, being very experienced this is a market that creates opportunity. It's very important for us to capitalize on the volatility and it's, again, it's a great opportunity for us. Our product is a natural hedge. It's again; it's a high yield product short duration that resets often. The underlying [Indiscernible] is always improving over the life of the loan, and it has a lot of enhancement to it. So it's a natural hedge that what you -- what would you rather have? You rather have a more, bonnet at 350 basis points, or would you rather have a loan book at 11% that has 30 points of equity that when you're done with it, it has 40 or 45 points of equity. It's a no brainer.

Jeffrey Moore

Okay. How much line of credit availability would you need to have to do, say $200 million or $300 million a month in originations or even kind of the numbers that we can kind of pencil in that you're probably going to be doing at some point?

Jason Kopcak

Well, look, we have $100 million right now. Frankly, you should be able to turn those lines three to four times a month, like without being pressured. So our current warehouse lines capacity could more than enough handle $200 million or $300 million in production. As I mentioned earlier, our lenders have come to us asking us if we want more balance sheet, more warehouse line, they like the product they like to yield. So and they like the profile, the asset, so they're increasing our facilities the goal right now is a focus on production, but we have enough warehouse line to hit the numbers that you're indicating. And we have enough people in the back office, primarily to get those numbers as well.

Jeffrey Moore

Okay. I guess my last question is, how are the -- how are there any updates on the Luxor or the Redleaf lawsuits?

Jason Kopcak

Yes, that information is going to be in our 10-K, which will be just filed on Monday. So there's -- they'll be there. There's no real, there's no real material update, but that information will be in the 10-K. They will be out on Monday.

Jeffrey Moore

Okay, cool. Thank you very much Jason. Great stuff and looking forward to the next call.

Jason Kopcak

That sounds good. Thanks guys.

Operator

Thank you. With no additional question, with no additional questions in queue, I'd like to turn the call back over to Mr. Kopeak for any additional or closing remarks.

Jason Kopcak

Again, thanks Katie for the intro. Finally, I just want to say I'm excited to be the teams I'm sorry, by our team's accomplishments this year. Since I joined last July I think we've gotten a lot done. We're in a great position to do great things going forward. So I look forward to ramping up our performance throughout the year. Thank you.

Operator

That will conclude today's call. We appreciate your participation.