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| 8-K - FORM 8-K - HOME LOAN SERVICING SOLUTIONS, LTD. | d614750d8k.htm |
 Investor Presentation
October 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
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
$1.6 billion¹
today
Conservative leverage and robust cash flow
Business
HLSS Overview
Growth Plan
Ocwen’s
portfolio,
including
announced
acquisitions,
includes
over
$58
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
Value
Proposition
HLSS’
assets represent a 5% first-priority claim against residential real
estate $6.8 billion of assets collateralized by $176.5 billion UPB of loans
serviced at September 30, 2013
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 $23.00 per share on October 17, 2013
|
 4
Leadership Team
William C. Erbey
Chairman of the Board
John P. Van Vlack
President
James E. Lauter
Chief Financial Officer
Richard Delgado
Treasurer
Bryon E. Stevens
Investor Relations & Capital Markets |
 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
$176.5
Billion
Portfolio
UPB
$169.7
Billion
Downside
Protection
$6.8 Billion
~95% decline in real estate value would be required to impair HLSS’
assets
HLSS’
total assets are 25 times over collateralized by ending UPB of $176.5 billion
90% of assets are Servicing Advances or Cash which are carried at par and have no
MTM 10% of assets are non-agency MSRs that have a stable valuation
history No change in servicing asset valuations since inception
Assets Are a 5% First-Priority Claim
Cash &
Reserves
1
$0.3 Billion
or 3%
Rights to MSRs
$0.6 Billion or 10%
Servicing Advances
$5.9 Billion or 87%
HLSS Assets
1
Reserves associated with the Advance Financing Facility
Note: Data as of Q3 2013 |
 7
Stable Revenue and Expenses
Predictable Revenue Stream
Known Expense Structure
Hedged Financing Cost
Revenues based on asset value
Expenses based on asset value
Ocwen bears operational risk and servicing cost volatility
MSR amortization is based on prepayment speeds which have decreased
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
Sub-servicing fees paid to Ocwen also based on UPB
Contractual annual revenue based on UPB |
 23
bps Subservicing
Fee paid to
Ocwen
18 bps
Incentive Fee
5 bps
Base Fee
~76%
Downside
Protection
~24%
Base Fee
HLSS' largest expense can be
reduced by up to ~76% 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'
earnings to withstand outsized
stress scenarios
Subservicing Fee Adjusts to
Support Targeted Yield
Note: Amounts based on 45bps servicing fee earned and 22 bps retained fee in Q3
2013. The incentive fee is the servicing fee minus the base fee and the retained fee
8 |
 9
Ocwen Contract Ties Servicing
Fees to Advance Ratio
Scheduled step-downs in the retained fee and advance ratio
Retained fees are servicing fees net of subservicing expenses paid to Ocwen
If the target advance ratio is exceeded in any month, the performance-based
incentive fee is reduced at the annual rate of 4.1% on excess servicing
advances Q3
retained
fee
of
22.0bps
includes
0.8bps
from
the
reduction
to
the
incentive
fee
Fee split determined to achieve a targeted yield at HLSS
Note:
The
retained
fee,
target
advance
ratio
and
penalty
rate
on
advances
in
excess
of
target reflect the weighted averages for the September 30, 2013 portfolio
|
 10
Fixed Rate Financing
Stabilizes Earnings
Issued three additional series of fixed rate term
notes:
August: $200 million of one-year and
$200 million of three-year notes at a
weighted average coupon of 1.64%
September: $350 million of one-year
notes at a weighted average coupon of
1.32%
Reduced rates on variable funding notes from
a weighted average spread over LIBOR of
1.81% to 1.35%
Non-use fee reduced from 0.75% to
0.50%
HLSS earns interest income on custodial
balances averaging $1.2 billion, providing a
hedge against rising interest rates
1
Excludes VFN Capacity
2
Projected borrowing is calculated based on a 90% borrowing rate on projected
servicing advances for the September 30 , 2013 portfolio, assuming a monthly
reduction of 2% in the advance to UPB ratio and an annual prepayment speed of
13.5% Lower Effective Interest Rate |
 11
Components of Income
Third quarter EPS of $0.49 is in line with previous guidance
The incentive fee represents 76% of total subservicing fees paid
to Ocwen
Earnings exceeded dividends declared during the quarter by $3.0 million
Third Quarter 2013 Earnings
($ in Millions)
1
Calculated using average UPB for Q3 2013
2
Non-GAAP
measure.
Please
see
our
earnings
release
dated
October
17,
2013
for
a
reconciliation
to
the
corresponding
GAAP
measure
3
Operating expenses and taxes, net of interest income and billing to Ocwen for
services provided |
 12
Components of Cash Flow
Cash generated available for distribution is 2.5x dividend declared during Q3
Cash available for reinvestment of $51.0 million allows HLSS to replenish and grow
its servicing portfolio through additional purchases from Ocwen
Total cash and available credit of $275.7 million at September 30, 2013
1
Servicing
advances
decreased
by
$188.4
million,
freeing
up
the
cash
“haircut”
component
of
financing
($ in Millions)
Third Quarter 2013 Cash Flow |
 13
Equity and Debt Yields
Note: Earnings yields based on historical EPS guidance. BBB Debt Yield based
on the most recent, 3-year BBB-rated servicing advance securitization at each respective date. Term Loan Yield based on initial pricing of
4.75% (including OID) and recent trading activity.
The presentation of EPS guidance and results from prior periods should not be
regarded as a representation that similar or better results will be achieved in future periods. |
 14
HLSS Expects to Maintain Yield
Under Economic “Shocks”
600bps Increase in LIBOR
Estimated Impact of a Spike in Delinquencies
and Advances on Net Income
1
Estimated Impact of a Spike in
LIBOR on Net Income
2
($ in Millions)
($ in Millions)
This
analysis
is
based
on
results
for
the
quarter
ended
September
30,
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
or
prepayment
speeds.
“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
of
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
a
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
custodial
accounts,
facility
reserve
accounts
and
corporate
cash.
“Realized
Gain
on
LIBOR
Swaps”
is
based
on
swaps
in
place
during
Q3
2013
and
assumes
hedge
accounting;
it
does
not
include
the
change
in
swap
deposits.
HLSS’
contract with Ocwen is designed to
stabilize earnings if delinquencies and
servicing advances increase
20% increase in Servicing Advance
Ratio resulting from a severe economic
downturn not expected to reduce
earnings
Fixed rate term borrowing and interest rate
hedges are designed to stabilize earnings if
interest rates increase
600bps LIBOR spike on variable
borrowing largely offset by realized
gains on interest rate swaps
20% Increase in Servicing Advance Ratio
$34.9
$37.9
11.9
(6.4)
(2.5)
Q3 2013
Net Income
Increase in Equity Yield
Interest
Expense
on Advance
Haircut
Reduction of
Subservicing
Fee
Q3 2013
Adjusted Net
Income |
 15
HLSS vs. Agency Mortgage REITs
HLSS has lower equity leverage than the mortgage REITs shown above
HLSS’
assets have lower mark-to-market risk and could earn more in a rising rate
environment HLSS’
financing is largely fixed-rate and matched to projected borrowing
Asset and Leverage Characteristics |
 16
Investment Highlights
Attractive risk-adjusted returns relative to other yield oriented
investments 7.8%
annualized
dividend
yield
1
based
on
current
share
price
25 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
$23.00
per
share
on
October
17,
2013 |