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| 8-K - FORM 8-K - HOME LOAN SERVICING SOLUTIONS, LTD. | d538098d8k.htm |
 Investor Presentation
May 2013
Exhibit 99.1 |
 2
FORWARD-LOOKING STATEMENT:
This presentation contains forward-looking statements that involve substantial
risks and uncertainties. All statements, other than statements of historical
facts, included in this presentation, including, without limitation,
statements regarding the assumptions we make about our business and economic model, our
dividend policy, including expected yields, business strategy and other plans and
objectives for our future operations, are forward looking statements. These
forward-looking statements are subject to inherent risks and
uncertainties in predicting future results and conditions that could cause the actual results to differ
materially from those projected in these forward-looking statements. We have
included important factors in the cautionary statements made in our Annual
Report on Form 10-K, particularly under the headings “Risk
Factors”
and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” that we believe could cause actual results or
events to differ materially from those expressed or implied by the forward
looking statements that we make in this presentation. In light of the significant uncertainties in
these forward-looking statements, you should not regard these statements as a
representation or warranty by us or any other person that we will achieve
our objectives and plans in any specified time frame, or at all. Unless
required by law, we undertake no obligation to publicly update or revise any forward-looking
statements to reflect new information or future events or otherwise.
NON-GAAP MEASURES:
In addition to financial measures prepared in accordance with generally accepted
accounting principles (“GAAP”), this presentation also contains
references to cash generated available for distribution, servicing
revenue
and
servicing
expense,
which
are
non-GAAP
performance
measures.
We
believe
these
non-GAAP
performance measures may provide additional meaningful comparisons between current
results and results in prior periods. Non-GAAP performance measures
should be viewed in addition to, and not as an alternative for, the
Company’s reported results under accounting principles generally accepted in the United
States. |
 3
Leadership Team
William C. Erbey
Chairman of the Board
John P. Van Vlack
President and Director
James E. Lauter
Chief Financial Officer
Richard Delgado
Treasurer
Michael J. McElroy
General Counsel
Bryon E. Stevens
Investor Relations & Capital Markets |
 4
HLSS is an independent acquirer of high-quality mortgage servicing
assets Mortgage servicing advances
Fees from servicing non-agency mortgage loans (Rights to MSRs)
Objective is to generate a stable, recurring, fee-based earnings stream
Low
fixed
infrastructure
costs
given
all
key
servicing
functions
performed
by
Ocwen
Equity
market
capitalization
has
grown
from
~$200
million
at
IPO
in
March
2012
to
$1.4 billion¹
today
Conservative leverage and robust cash flow
Business
HLSS Overview
Growth Plan
Current
Ocwen
portfolio
includes
over
$100
billion
UPB
available
for
purchase
Demonstrated ability to close purchases simultaneous to funding prevents
earnings drag
WKSI eligibility simplifies future equity offerings and facilitates access to
capital Focused on adding similar non-agency mortgage assets (subprime
and Alt-A) Value
Proposition
HLSS's assets represent a 5% first-priority claim against residential real
estate $4.1 billion of assets collateralized by $92.5 billion UPB of loans
serviced Opportunity to invest in stable non-agency mortgage assets
largely inaccessible to debt and equity investors
Unique business model with downside protection and potential to increase earnings
Liquidity
risk
mitigated
by
match
funded
capital
structure
–
assets
self-liquidate
at
par
1
Based on the closing share price of $23.87 per share on May 10, 2013
|
 5
Mortgage Servicing
Back office for non-agency mortgage
market
Receives payments from homeowner
Distributes payments to loan owner
Advance payments for delinquent
borrowers (Servicing Advances)
Repaid from borrower payments and
liquidation proceeds
Paid fixed fee (MSR Asset)
No exposure to mortgage credit losses
Borrower
Borrower
Borrower
Borrower
Borrower
Monthly P&I
+Liquidation Proceeds
Monthly P&I
+ Liquidation Proceeds
–
Servicing Fees
–
Advances Repaid
Bond Holders
Servicer
Servicing
Advances
New
Repaid |
 6
$92.5 Billion
UPB
$88.4 Billion
$4.1 Billion
~95% decline in real estate value would be required to impair HLSS's assets
95.6%
Downside
Protection
HLSS Assets
Minimal credit risk due to over
collateralization
Advances recovered at “top-of-
the-waterfall”
from
loan
proceeds
If loan proceeds are ever
insufficient, recovery is from
collections on other loans in
RMBS trust
Assets
Are
a
5%
First-Priority
Claim |
 7
Limited Valuation Risk
Cash &
Reserves
$151.7
Total Assets of $4.1 billion are 23 times
over-collateralized by ending UPB of $92.5
billion
90% of assets are Servicing Advances or
Cash which are carried at par and have no
valuation risk
10% of assets have a stable valuation
history
Rights to MSRs represent the present
value of future servicing fees, less
expenses
Low prepayment rate that is not
correlated with interest rates for this
portfolio of non-agency mortgages
No change in servicing asset valuations
since inception
March 31, 2013
($ in Millions)
1
Rights to
MSRs
$393.8
Servicing
Advances
$3,524.3
Total Assets
$4,069.8
100%
Servicing Advances & Cash
$3,676.0
90%
MSRs
393.8
10%
1
Reserves associated with the Advance Financing Facility
|
 8
Stable Revenue and Expenses
Predictable Revenue Stream
Known Expense Structure
Hedged Financing Cost
Fixed rate notes with maturities matched to expected borrowing needs
Variable rate exposure hedged via LIBOR swaps extending 60 months
Stability
of
revenue,
borrowing
cost
and
asset
valuations
result
in
predictable
earnings
Expenses based on asset value
Sub-servicing fees paid to Ocwen also based on UPB
Ocwen bears operational risk and servicing cost volatility
MSR amortization is based on prepayment speeds which have decreased Revenues based on asset value
Contractual annual revenue based on UPB
|
 9
23 bps
Subservicing
Fee paid to
Ocwen
17 bps
Incentive Fee
6 bps
Base Fee
~74%
Downside
Protection
~26%
Base Fee
HLSS's largest expense can be
reduced by up to ~74% to stabilize
earnings
Protects against higher interest
expense if Servicing Advances
increase
HLSS benefits from lower interest
expense if Servicing Advances
decrease
Incentive fee exceeds interest
expense, allowing HLSS's
earnings to withstand outsized
stress scenarios
Subservicing Fee Adjusts to
Support Targeted Yield
Note: Amounts based on 50bps servicing fee earned and 27 bps retained fee in Q1
2013. The incentive fee is the servicing fee minus the base fee and the retained fee |
 10
Ocwen Contract Ties Servicing
Fees to Advance Ratio
Scheduled step-downs in the retained fee and advance ratio
Fee split constructed to achieve a targeted yield at HLSS
3.53%
3.31%
3.13%
2.96%
2.76%
2.58%
2.46%
3.81%
1.75%
2.50%
3.25%
4.00%
20.0
22.0
24.0
26.0
28.0
Retained Fee
Target Advance Ratio
Actual Advance Ratio
Retained fees are servicing fees net of subservicing expenses paid to Ocwen
If the advance ratio is exceeded in any month, the performance-based incentive fee is
reduced at the annual rate of 5.33% on excess servicing advances
|
 11
Improved Financing Cost and
Duration
5.44%
5.01%
3.48%
2.76%
2.50%
2.00%
4.00%
6.00%
Q212
Q312
Q412
Q113
Q213
$977.4
$900.0
$293.5
$800.0
$150.0
On January 22, 2013, completed the issuance of
$650 million of one-year, $350 million of three-year
and $150 million of five-year fixed rate term notes
secured by servicing advance receivables
Weighted average spread over LIBOR of 0.94%
is down from a 1.55% spread on similar notes in
the last ABS note issuance
Hedge interest rate exposure by swapping out
floating rate instruments with fixed rate
Reduced financing costs on existing VFN capacity
from a weighted average spread over LIBOR of
2.32% to 1.95%
Latest flow purchase provides opportunity to return
to the ABS market to further extend maturities and
lock in interest rates
HLSS has taken advantage of the availability of
ABS term notes with tenures up to 5 years in order
to match duration of its liabilities to its projected
assets
Longer Note Maturities
Lower Effective Interest Rate¹
($ in Millions)
¹
Interest expense includes the cost of hedges
²
Pro forma estimate based on borrowing at 3/31/2013
³
Maximum borrowing capacity
(2)
$1,300.0
(3)
VFNs
1Yr MTNs
2a-7
3Yr MTNs
5Yr MTNs
Aug-13
Oct-13 / Jan-14
Sep-14
Oct-15 / Jan-16
Jan-18 |
 12
Components of Income
Incentive
Results for the first quarter include a $0.03 per share impact due to a lower
amortization rate of 12.7% versus the 15.0% expected
rate The
incentive
fee
represents
74%
of
total
subservicing
fees
paid
to
Ocwen
Earnings exceeded dividends declared during the quarter by $3.2 million
First Quarter 2013 Earnings
($ in Millions)
47.05
Basis points
per UPB¹
(Annualized):
1
Calculated using average UPB for 1Q 2013
2
Operating expenses and taxes, net of interest income and related party
revenue Retained Fee
50 bps
23 bps
9 bps
5 bps
1 bps
12 bps
Base
18.24
10.64
1.54 |
 13
$24.79
$87.50
$65.89
10.64
50.34
1.73
21.61
Net Income
Amortization of
MSRs
Decrease in
advance haircut
Changes in
other assets /
liabilities
Cash generated
available for
distribution
Dividends
declared
Cash
available for
reinvestment
Cash generated available for distribution is 4x dividend declared during Q1
Cash
available
for
reinvestment
of
$65.89
million
allows
HLSS
to
replenish
and
grow its servicing portfolio through additional purchases from Ocwen
1
($ in Millions)
First Quarter 2013 Cash Flow
Components of Cash Flow
4x Dividend
Coverage
1
Servicing
advances
decreased
by
$307.1
million,
excluding
the
most
recent
purchase,
freeing
up
the
cash
“haircut”
component
of
financing |
 14
Q1 2013
Net Income
Increase in
Interest
Expense
Equity
Yield on
Advance
Haircut
Reduction of
Subservicing
Fee
Q1 2013
Adjusted Net
Income
150bps Increase in LIBOR
600bps Increase in LIBOR
HLSS Expects to Maintain Yield
Under Economic “Shocks”
Estimated
Impact
of
a
Spike
in
Delinquencies
and
Advances
on
Net
Income
(1)
Estimated Impact of a Spike in LIBOR on Net Income
($ in millions)
($ in millions)
Q1 2013
Net Income
Increase in
Interest
Expense
Increase in
Interest
Income
Realized
Gain on
LIBOR
Swaps
Q1 2013
Adjusted Net
Income
5% Increase in Servicing Advance Ratio
20% Increase in Servicing Advance Ratio
The
analysis
above
is
based
on
results
for
the
quarter
ended
March
31,
2013.
Results
for
prior
periods
and
the
estimated
adjustments
are
not
necessarily
indicative
of
results
or
the
impact
of
adjustments
for
future
periods.
(1)
“
Increase
in
Interest
Expense”
reflects
estimated
increase
in
borrowing
cost
to
finance
higher
Servicing
Advances
assuming
no
changes
in
interest
rates.
“Equity
Yield
on
Advance
Haircut”
reflects
the
foregone
earnings
(based
on
current
earnings
yield)
resulting
from
the
reduction
in
income-earning
MSR
assets
as
more
capital
is
invested
in
the
equity
component
of
Servicing
Advances.
“Reduction
in
Subservicing
Fee”
reflects
the
amount
the
Performance
Fee
(a
component
of
the
Subservicing
Fee)
would
be
reduced
pursuant
to
arrangements
in
place.
(2)
“Increase
in
Interest
Expense”
reflects
impact
of
rate
increase
on
variable
rate
borrowing
on
Servicing
Advances
based
on
the
current
note
structure
and
assumes
no
change
in
asset
values.
“Increase
in
Interest
Income“
reflects
the
increase
in
interest
earned
on
reserve
accounts
and
corporate
cash.
“Realized
Gain
on
LIBOR
Swaps”
is
based
on
swaps
in
place
during
Q1
2013
and
assumes
hedge
accounting;
it
does
not
include
the
change
in
swap
deposits.
Q1 2013
Net Income
Increase in
Interest
Expense
Equity
Yield on
Advance
Haircut
Reduction of
Subservicing
Fee
Q1 2013
Adjusted Net
Income
Q1 2013
Net Income
Increase in
Interest
Expense
Increase in
Interest
Income
Realized
Gain on
LIBOR
Swaps
Q1 2013
Adjusted Net
Income
$24.8
$25.2
2.1
(1.2)
(0.5)
$24.8
$26.4
8.5
(5.0)
(1.9)
$24.8
$24.6
(7.6)
1.5
6.0
$24.8
$24.8
( 1.9)
0.4
1.5
(2) |
 15
Equity and Debt Yields
Note: Earnings yields based on annualized per-share earnings guidance of $0.325 (Q1 2012 earnings
transcript), $0.325 (Q2 2012 earnings transcript), $0.385 (Q3 2012 earnings transcript), $0.405
(11/15/2012 press release), $0.425 (Q4 2012 earnings transcript) and $0.455 (Q1 2013 earnings transcript); calculation at a given date contains most recent guidance divided by the share
price.
Debt yields based on the most recent, 3-year BBB-rated servicing advance securitization at
each respective date. Trading yield point based on current trading yield of 3-year BBB-rated servicing
advance securitization.
Prospective purchasers should not place undue reliance on expectations or guidance shown above, and
the presentation of guidance and results from prior periods should not be regarded as a
representation that similar or better results will be achieved in future periods. |
 16
Investment Highlights
Attractive risk-adjusted returns relative to other yield oriented
investments 23 times over-collateralization virtually eliminates credit
risk Asset
composition
–
90%
servicing
advances
and
cash
mitigates
valuation
risk
Profits
purchased
up
front
–
targeted
return
not
dependent
on
asset
appreciation
or
valuations
Ocwen retains all operating risk under an incentive contract designed to stabilize
HLSS earnings Solid downside protection with limited exposure to a down
economy but opportunity to increase dividend in an improving economy with
rising interest rates Cash flow in excess of dividend used to replenish and
increase asset base in accretive flow transactions
High Quality Assets
Stable Earnings Stream
Large Positive Alpha
1
Based on the closing share price of $23.87 per share on May 10, 2013.
–
7.0% annualized dividend yield based on current share price
1
|