Good morning, and welcome to the Altisource Second Quarter 2020 Earnings Conference Call. My name is Brandon, and I'll be your operator for today. I will now turn it over to Michelle Esterman, Chief Financial Officer. You may begin.

Thank you, operator. We first want to remind you that the earnings release, Form 10-Q and quarterly slides are available on our website at www.altisource.com. These provide additional information investors may find useful. Our remarks today include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ. In addition to the usual uncertainty associated with forward-looking statements, the current COVID-19 pandemic makes it extremely difficult to predict the future state of the economy and its potential impact on Altisource. The inherent uncertainty of the impact of future events on Altisource is also impacted by Ocwen's recent communication to us that it has been directed by an MSR investor to move build services and other service referrals from Altisource to another service provider. Please review the forward-looking statements section in the company's earnings release quarterly slides and Form 10-Q as well as the risk factors contained in our 2019 Form 10-K and first quarter Form 10-Q, which describe factors that may lead to different results. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. In our earnings release and quarterly slides, you will find additional disclosures regarding the non-GAAP measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix to the quarterly slides. Joining me for today's call is Bill Shepro, our Chairman and Chief Executive Officer. I would now like to turn the call over to Bill.

Thanks, Michelle. Good morning, and thank you for joining today's call. This morning, I will provide a brief summary of our second quarter financial performance and discuss the operational and financial impact on Altisource from COVID-19 and Ocwen's communication to us that an MSR investor is directing it to move certain service referrals historically provided to Altisource to another vendor. I will also cover our objectives for the balance of the year, including our preparation to capture the countercyclical opportunity from higher delinquencies and our plans to reduce internal costs and grow earnings. As a result of the pandemic, Altisource is facing an unprecedented and challenging business environment with industry-wide second quarter foreclosure initiations down by approximately 85% and lender-completed foreclosures down by 75% compared to the second quarter of 2019. Despite the 306% increase in seriously delinquent loans over the same period. Turning to Slide 5, as anticipated, our second quarter revenue of $91 million, adjusted pretax loss of $10 million and adjusted EBITDA loss of $2 million reflect the full quarter impact from COVID-19, which was partially offset by our cost reduction efforts. Since the national emergency was declared in March, federal and various state governments have taken measures to provide financial support to residential mortgage borrowers, including mortgage forbearance programs and foreclosure and eviction moratoriums. For varying lengths of time during the quarter, most states enacted stay-at-home orders and restricted services to only those deemed essential. These measures significantly reduced our default-related referrals and revenue for the quarter. Strong growth across our origination-related businesses from a historically low-interest rate environment success from our business development efforts and a rebound in June home sales partially offset these declines. As you can see on Slide 6, second quarter revenue from customers other than Ocwen, NRZ and RESI in our core lines of business was 5% higher than the second quarter of 2019, driven by strong growth in our origination-related businesses, partially offset by a decline in some of our default-related businesses, primarily from governmental actions related to the pandemic. In this difficult environment, we acted quickly to reduce costs, worked to mitigate the impact to our customers and supported the safety of our employees. As a result, the vast majority of our staff are working from home, and we are able to preserve cash, ending the quarter with $68 million in cash and cash equivalents. Keep in mind that this excludes our marketable securities. For a more detailed description of our second quarter financial performance compared to prior periods, please refer to today's press release and Form 10-Q. We anticipate this short to medium-term pressure on our default-related businesses to continue. Governmental forbearance programs and moratoriums temporarily prevent servicers from pursuing foreclosure of delinquent loans. More recently, as set forth on Slide 7, Ocwen advised us that an MSR investor instructed it to move certain referrals for field services to another service provider beginning in July, with the balance anticipated to be moved over the next couple of months. Ocwen also advised us that this same investor intends to instruct Ocwen to utilize a different provider for certain other services, at unspecified future dates. We believe the MSR investor providing this direction is NRZ, and that the referrals are being moved to service businesses that NRZ either owns or in which it has invested. We believe that these actions violate our agreements with Ocwen, and we are currently in discussions with Ocwen to address this matter and have reserved all rights. We estimate that revenue from the NRZ portfolios excluding revenue we earned from our cooperative brokerage agreement with NRZ represented approximately 39% or $70 million to $79 million of our first half 2020 service revenue, the majority of which is in the lower margin field services business. We estimate that the field services portion of this service revenue was $58 million. Because it is difficult to predict the timing of the potential change of Altisource as the service provider, our 2021 forecast conservatively assumes that we don't generate any revenue from these portfolios. The investors' decision to change service providers does not impact the cooperative brokerage agreement where we provide REO brokerage and auction services to NRZ. To address lower than previously anticipated revenue from Ocwen, and the extension of foreclosure and eviction moratoriums, we are developing a plan to implement additional cost-reduction measures. As you can see on Slide 8, based upon our current planning, we are forecasting Altisource to generate 2021 service revenue of $250 million to $270 million, adjusted EBITDA of $35 million to $43 million and adjusted EBITDA margins of 14% to 16%. This forecast includes the anticipated impact from the pandemic, the loss of service referrals from the Ocwen, MSR investor that I just discussed and our anticipated cost-reduction measures. We believe there is a substantial opportunity for revenue growth and margin improvement from these amounts in 2022 and beyond. Given the very volatile environment associated with the pandemic and the recent Ocwen news, there is greater uncertainty that could cause our actual results to differ materially from our forecast. We believe that despite these near-term headwinds, we have a strong set of mature and comprehensive real estate mortgage businesses that are well positioned and ready to capture the opportunity from the higher delinquency environment once the temporary governmental programs are lifted. Keep in mind that the default business for Altisource is not lost; rather, it has been pushed off as a result of these programs. In a normal market, we estimate that for every 1% increase in delinquency rates, the addressable market for our default-related services increases by approximately $700 million. Based on the increase in 30-plus day delinquencies since the beginning of the year, we estimate that the addressable market for our services has grown by over $2.7 billion. With our attractive and growing customer base, we should begin to benefit from the growing addressable market as the temporary governmental relief expires. Turning to Slide 9 and our business objectives. As we look to the balance of the year, we have three primary objectives: first, preserve cash; second, position the default-related businesses for tremendous medium to longer-term upside; and third, continue to grow our origination services businesses. Beginning with our objective to preserve cash, our top priority is to preserve liquidity given our current environment. Altisource has a capital-light business model with a highly variable cost structure. As I discussed earlier, we are developing a cost reduction program to achieve our 2021 financial objectives. This should leave Altisource in a good position when demand for our default-related services returns and grows. This brings me to our second objective. Turning to Slide 10, and our default-related businesses, we are optimistic about our long-term potential for these businesses despite the short-term challenges. As shown on Slide 11, delinquency and unemployment rates are rising at a historically fast pace. According to Black Knight, the National 30-plus day mortgage delinquency rate in June was 7.6% compared to 3.2% in January, and the number of seriously delinquent mortgages increased from 400,000 to 1.9 million, the highest level since early 2011. The unemployment rate remains high at 11%. As we look ahead, we believe the unprecedented level of foreclosure and eviction relief will subside. And if unemployment rates are elevated, delinquency levels are likely to remain substantially higher than they were before the pandemic began. This should drive a strong rebound in our default-related businesses toward the middle to the end of next year and aligns very much with the feedback we are receiving from our clients. In the meantime, we are enhancing our technology to improve the efficiency of our field services business and extend the reach of our Hubzu marketplace. Turning to our third objective in growing our origination businesses. As you can see on Slide 12, we have a robust suite of origination solutions that benefited from a low-interest rate environment and strong business development activity. In addition to market tailwinds, we have a large opportunity to grow our origination-related businesses by capturing greater wallet share from the Lenders One mortgage cooperative members and converting our sales pipeline. Slide 13 provides you with an update on select sales wins. We are confident in Altisource's long-term potential. We believe that as the default-related market returns, and as we continue to grow our originations-related businesses, we'll be a stronger and more diversified company that is better positioned to withstand varying economic cycles. We have an efficient and scalable business model that can adjust to the current environment and should benefit tremendously once delinquent loans begin to move through the normal default life cycle. I'll now open up the call for questions.

From B. Riley, we have Raj Sharma.

The loss in the MSR related to NRZ was mentioned in the first quarter. Can you provide any updates on the timing of when the NRZ business will be fully phased out? Additionally, is the impact still the same across default services and the marketplace, or is there anything new from what was discussed in the first quarter?

Yes, Raj. Earlier this year, we estimated that the NRZ business, excluding the cooperative brokerage agreement, which isn’t affected by this, accounted for about 40% of our service revenue for the first half. For the first half of the year, it actually represented about 39%, which is slightly lower than what we predicted earlier. In terms of timing, in July, Ocwen began transitioning some inspection work from Altisource to Guardian, which is owned by NRZ. We anticipate that this transition will continue, and the REO-related work in field services will shift over the next couple of months as well. As for the other services, we know that Ocwen is discussing redirecting those services with NRZ, but we don’t have information on the timing. In the forecast I mentioned in my prepared remarks, we conservatively assume that everything will transition before the start of next year. Again, this does not impact the marketplace business.

When do you think the moratoriums will end? Can you provide any insight on that and the timeline, especially considering that serious delinquencies are increasing rapidly? Once the moratoriums are lifted, when do you anticipate that will impact your income statement?

The governmental forbearance program was established in late March, resulting in nearly 4 million borrowers currently under some form of forbearance, which can last up to a year without requiring payments. Additionally, the foreclosure and eviction moratoriums originally set to end in June have been extended to the end of August, effectively halting those actions. Historically, even in a low delinquency environment, there were about 120,000 foreclosure starts each quarter and approximately 30,000 completions. In the second quarter of this year, there were only 18,000 foreclosure starts and likely fewer than 10,000 completions, reflecting a significant decline. The positive aspect is that this revenue is not permanently lost. Compared to the origination space, where interest rates are at historic lows prompting refinancing activities, we have a considerable backlog of business that is not currently being processed due to the moratoriums. Alongside this, we are witnessing a substantial increase in delinquency rates, which has yet to translate into revenue for us. We see this as building a significant future pipeline for Altisource. Regarding the timing, the moratoriums are set to last until the end of August, with the possibility of further extensions, though no decisions have been made by the government yet. The forbearance plans will start rolling off between late March next year and the following summer, initiating the loss mitigation process. Our clients anticipate that 25% to 50% of loans in forbearance may enter some form of loss mitigation, which could lead to considerable revenue for Altisource.

From Northland Securities, we have Mike Grondahl.

Bill, any estimate on the second quarter sort of missed revenue due to the forbearance situation?

In the second quarter, we performed slightly better than our expectations related to COVID-19. The marketplace business experienced a significant downturn in the latter half of March, as well as in April and May. We still have a sizable inventory of real estate owned properties, and although we're not seeing a lot of new inflows, that inventory has helped us as the home sale market strengthened starting in June. However, I would estimate that we are still down by at least 25%, if not more, in total revenue for the second quarter compared to what we would typically expect in a normal market. Michelle, do you have anything to add?

But yes, I think that's fine, Bill.

Yes, understood. Can you share some details about the specific areas you're focusing on for expenses? Do you have an estimated range of dollars that you believe can be reduced?

Yes. So if you remember, we initially had worked on a plan that was going to take our run rate down. Michelle, correct me if I'm wrong, from the end of last year? Was it $45 million to $50 million?

Yes. That's right.

And so Mike, that was some planning that we had already started related to what's going on in our environment. And then when the moratoriums got extended, and the news from Ocwen sort of crystallized that risk that we've been talking about for some time, we've started developing additional plans. And I think, Mike, without going into all the specifics, we're very, very actively working on plans that will get us to that 14% to 16% EBITDA margins for next year. But think about like in field services, Mike, which is one of our lower-margin businesses, probably a 10% to 15% margin business. Most of the costs in that business are variable. If we don't receive a referral, we don't incur an expense. And the same applies to a lot of our other services. So our outside goods and services automatically go down with a decline in referrals. And then beyond that, we're looking at basically everything at the company in terms of discretionary spending, unrelated to what we need to support the growth that we anticipate coming. Corporate costs, business unit costs, we're looking at all of it and developing plans.

It seems that we should expect the most impact from forbearance in the third and fourth quarters. This is because we sold our inventory in the second quarter, but we won't see much inflow, which means that will be the time we feel the effects the hardest. Would you agree?

Yes, we are putting in a lot of effort. We anticipate some challenges in the second half of the year because there is uncertainty regarding whether the moratoriums will be extended. We also don’t have a clear picture of what will happen if they are extended, especially since some borrowers affected by the moratoriums may already have forbearance plans in place. This uncertainty makes it difficult to predict the second half of the year. With that in mind, based on our internal planning and the cost-saving measures we're implementing, we aim to minimize cash burn as much as possible during this period. While I don't expect to break even in terms of EBITDA, we are working diligently to get close to it. However, there are many factors to consider, including what’s happening with Ocwen and the timing of transitions to other vendors on NRZ's behalf, as well as the situation with the moratoriums.

Sure, sure. And then just last question. What are your legal rights? What are you kind of pursuing with Ocwen? You said you were discussing, talking with them. What are you hoping to gain?

Yes, absolutely. I want to start by mentioning that we have a very positive working relationship with Ocwen. Currently, we are engaged in a constructive dialogue with them regarding NRZ's recent direction toward Ocwen. While I can't get into the specifics at this moment, we will provide updates as more information becomes available. We continue to have a strong working relationship with Ocwen and are actively discussing ways to resolve these issues. Hopefully, we will have more to share soon.

We have a follow-up from Raj Sharma. We have a very good working relationship with Ocwen and are currently engaged in a constructive dialogue with them regarding NRZ's direction towards Ocwen. I don't want to go into details, Mike, but we will share more as we have updates. Our working relationship with Ocwen remains strong, and we are having a robust conversation about resolving these issues. Hopefully, there will be more information to share soon.

Bill, Michelle, can you provide an update on your liquidity? You've mentioned that you're working towards being breakeven, but can you also discuss any upcoming debt obligations and your current cash levels? Additionally, how do you plan to handle the decline in business volumes into next year?

Yes. So Raj, we feel, based on the planning we've done in our current forecast, we feel good about our liquidity, and I think we ended the quarter with $68 million. I looked at our cash position a couple of days ago. It was over $70 million. So cash continues to be strong. And as you know, we're a capital-light business. We spend very, very little on capital. If we spend another $1 million, $1.5 million the rest of the year, I think that's probably a reasonable estimate. So we feel very good about our liquidity. And then when you look at our planning for next year, and those EBITDA levels, we're talking about plenty of liquidity to cover our debt service. We believe we have plenty of liquidity to cover our debt service and generate some excess cash flow next year. And our last point, Raj, on the loan. It's a covenant-light loan. There's an excess cash cost. So if net debt-to-EBITDA gets above a certain level, a certain percentage of our 25% and then 50% of excess cash flow that we generate during that period is used to reduce the debt, but there's no financial covenants, and the loan doesn't mature until April 2024.

No amortizations?

There's a minor amount of amortization. I think contractual amortization is about $13 million between now and maturity.

Our next amortization event doesn't occur until March of 2023.

Yes. So we feel very good about our liquidity. And we've got a very good plan that we're developing that we think positions Altisource as a stronger, more diversified, fast-growing company that can take advantage of the growing delinquency rates, which we believe this revenue has not been lost but deferred.

And also, just one last question on the servicers. The new servicers you added some new business this quarter, any new wins?

Yes, we are successfully securing deals and expanding our pipeline. We are launching a project for a top 5 bank in September to assist with their forbearance programs. We are also nearing agreements with multiple banks and nonbanks related to our marketplace business. When volumes increase, we will gain more customers, which should provide us with further benefits. We are very satisfied with the growth and progress of our pipeline.

Okay. Showing no further questions at this point. We'll now turn it back to Bill Shepro for closing remarks.

Thanks, operator. Thanks for joining today's call, and we look forward to talking to you as the quarter progresses. Take care.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.